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Agricultural Credit: Institutions and Issues

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Agricultural Credit: Institutions and Issues Jim Monke Specialist in Agricultural Policy July 14, 2010February 7, 2013 Congressional Research Service 7-5700 www.crs.gov RS21977 CRS Report for Congress Prepared for Members and Committees of Congress Agricultural Credit: Institutions and Issues Summary The federal government has long providedprovides credit assistance to farmers, in response to insufficient lending in rural areas or a desire for targeted lending to disadvantaged groups. One federal lender to assure adequate and reliable lending in rural areas, particularly when farmers cannot obtain loans elsewhere. Federal farm loan programs also target credit to beginning farmers and socially-disadvantaged groups. The primary federal lender to farmers is the Farm Service Agency (FSA) in the U.S. Department of Agriculture (USDA). It issues direct loans to farmers who cannot qualify for regular credit, and guarantees repayment of loans made by other lenders. Thus, FSAFSA thus is called a lender of last resort. Of about $240250 billion in total farm debt, FSA provides about 2% through direct loans, and guarantees about another 4%-5% of loans. Another federally related lender is the Farm Credit System (FCS), a cooperatively owned, but federally chartered lender with a statutory mandate to serve agriculture-related borrowers. FCS makes loans to creditworthy farmers, and is not a lender of last resort. FCS accounts for about 39% of farm debt. Commercial banks are the largest farm lender and hold 44% of total farm debt. While the global financial crisis that escalated in 2008 was slower to affect agricultural balance sheets than the housing market, it has begun to take its toll. Net farm income fell by 35% in 2009, reducing some farmers’ ability to repay loans—particularly among dairy, hog, and poultry farms. Delinquency rates (loans that are more than 30 days past due) on residential mortgages began to rise in 2005, but delinquency rates for agricultural loans did not begin to rise until mid-2008 and have not risen as quickly. The delinquency rate on residential mortgages was 11.3% in March 2010; it reached 3.1% for agricultural loans in December 2009, and was 2.89% in March 2010. Because of the financial turmoil, the USDA farm loan program has seen significantly higher demand. In FY2009, FSA had its highest loan authority since 1985, issuing $4.5 billion of loans and guarantees. Two supplemental appropriations added more than $1.1 billion to $3.4 billion of regularly appropriated loan authority. The regular FY2010 appropriation provided even more, $5.1 billion. A pending FY2010 supplemental appropriation (H.R. 4899) would add $950 million of additional loan authority, for a possible total loan authority of $6 billion. Term limits have been part of the USDA farm loan program since the financial crisis of the 1980s. They encourage farmers to graduate to commercial loans by placing a maximum number of years that farmers are eligible. However, Congress has suspended application of the guaranteed operating loan term limit to prevent some farmers from being denied credit. USDA says that 3,800 current borrowers have reached the limit and would not qualify if the term limit was not suspended. The 2008 farm bill renewed the suspension of this term limit, but only through 2010. In the Senate, S. 3221 would extend the suspension of term limits for two more years, until December 31, 2012. This would allow the issue to wait to be addressed in the next farm bill. Also because of the financial crisis and debt repayment problems, farmers’ use of mediation services has increased. USDA has a grant program that provides matching funds through the states to mediators. The $4 million program is authorized through FY2010. House-passed H.R. 3509 would reauthorize the program through FY2015, as would Senate-introduced S. 1375. Finally, FCS is seeking to expand its authority through a broader list of permissible investments. The 2008 farm bill did not expand FCS’s lending authority, but a proposed rule would allow FCS to “invest” through bonds or other assets to finance certain rural infrastructure, housing facilities, and rural business investment companies. Under statute, FCS cannot be a lender to these nonfarm entities. Disposition of the proposed rule awaits action by the Farm Credit Administration (FCA), the federal regulator. FCA’s 2010 regulatory agenda listed the rule as “undetermined” and did not anticipate a decision. Congress does not have a role in this regulatory approval process. Congressional Research Service Agricultural Credit: Institutions and Issues Contents Current Situation.........................................................................................................................1 Major Players and Market Shares ..........................................................................................1 The Farm Balance Sheet .......................................................................................................3 Agricultural Lending in the Global Financial Crisis...............................................................5 Delinquencies and Nonperforming Loans........................................................................5 Challenges Facing Agricultural Lenders ..........................................................................7 Review of Farm Loan Restructuring................................................................................8 Description of Government-Related Farm Lenders ......................................................................9 USDA’s Farm Service Agency (FSA) ....................................................................................9 Farm Credit System (FCS) ....................................................................................................9 Farmer Mac ........................................................................................................................ 10 2008 Farm Bill Provisions................................................................................................... 10 Farm Service Agency .................................................................................................... 10 Farm Credit System ...................................................................................................... 11 Issues for Congress ................................................................................................................... 11 Supplemental Appropriations for USDA Farm Loans .......................................................... 11 Term Limits on USDA Farm Loans ..................................................................................... 13 Farm Operating Loans................................................................................................... 13 Farm Ownership Loans ................................................................................................. 14 Agricultural Mediation Grants............................................................................................. 14 Farm Credit Administration Proposed Rule on Investments ................................................. 14 Background on FCS Proposals for Expansion................................................................ 15 Mission-Related Investments ........................................................................................ 15 Figures Figure 1. Market Shares by Lender of Total Farm Debt, 1960-2008 .............................................2 Figure 2. Market Shares of Real Estate Farm Debt, 1960-2008 ....................................................2 Figure 3. Market Shares of Non-Real Estate Farm Debt, 1960-2008 ............................................2 Figure 4. Farm Assets, 1960-2010 ...............................................................................................4 Figure 5. Farm Debt, 1960-2010 .................................................................................................4 Figure 6. Debt-to-Asset Ratio, 1960-2010 ...................................................................................4 Figure 7. Net Farm Income, 1960-2010 .......................................................................................4 Figure 8. Net Farm Income and Government Payments, 1960-2010.............................................4 Figure 9. Debt-to-Net Farm Income Ratio, 1960-2010.................................................................4 Figure 10. Delinquency Rates on Loans at Commercial Banks, 1990-2010..................................6 Figure 11. Nonperforming Farm Loans, 1990-2010 .....................................................................6 Congressional Research Service Agricultural Credit: Institutions and Issues Tables Table 1. USDA Farm Loans in Enacted FY2009-FY2010 Appropriations and Proposed FY2010 Supplemental Appropriations.................................................................................... 12 Contacts Author Contact Information ...................................................................................................... 17 Congressional Research Service Agricultural Credit: Institutions and Issues Current Situation Major Players and Market Shares The federal government has a long history of providing credit assistance to farmers. This intervention has been justified at one time or another by many factors, including the presence of asymmetric information among lenders, asymmetric information between lenders and farmers, lack of competition in some rural lending markets, insufficient lending resources in rural areas compared to more populated areas, and the desire for targeted lending to disadvantaged groups (such as small farms or socially disadvantaged farmers).1 The lender with the greatest connection to the federal government is the Farm Service Agency (FSA), in the U.S. Department of Agriculture (USDA). It issues direct loans and guarantees on loans made by commercial lenders to farmers who do not qualify for regular credit. Therefore, FSA is called a lender of last resort. Because FSA also has targets or funds reserved for disadvantaged groups, it sometimes nearly 43% of farm debt. Commercial banks are the other primary agricultural lender, holding slightly more than FCS with over 43% of total farm debt. Generally speaking, the farm sector’s balance sheet has remained strong in recent years. While delinquency rates on farm loans increased from 2008 into 2010, farmers and agricultural lenders did not face credit problems as severe as those of other economic sectors. Since 2010, loan repayment rates have improved. But appropriations for the FSA loan program—and the ability of FSA to meet demand for its loans and guarantees—have been constrained during an era of tight federal budgets. Statutory authority for FSA and FCS is permanent, but periodic farm bills often make adjustments to eligibility criteria and the scope of operations. In the 112th Congress, both the Senate-passed farm bill (S. 3240) and the House-reported farm bill (H.R. 6083) would have made relatively small policy changes to USDA’s credit programs in Title V. Term limits on the number of years that borrowers may remain eligible for loans may be an issue, as well as expanding existing loan programs to serve non-traditional farm producers, such as producers for local and regional food systems. In 2013, USDA created a microloan program to expedite small operating loans to nontraditional agricultural producers. Finally, efforts to expand Farm Credit System activities into new mission areas using regulatory powers may continue. Congressional Research Service Agricultural Credit: Institutions and Issues Contents Current Situation .............................................................................................................................. 1 Major Players and Market Shares.............................................................................................. 1 The Farm Balance Sheet ............................................................................................................ 3 Agricultural Lending Situation and Challenges ........................................................................ 5 Description of Government-Related Farm Lenders ......................................................................... 7 USDA’s Farm Service Agency (FSA) ....................................................................................... 7 Farm Credit System (FCS) ........................................................................................................ 7 Farmer Mac ............................................................................................................................... 8 Issues for Congress .......................................................................................................................... 8 Credit Title in the Next Farm Bill.............................................................................................. 8 Term Limits on USDA Farm Loans .......................................................................................... 8 Farm Operating Loans......................................................................................................... 9 Farm Ownership Loans ....................................................................................................... 9 Loans to Small and Local and Regional Food Producers ........................................................ 10 Farm Credit Administration Proposed Rule on Investments ................................................... 11 Background on FCS Proposals for Expansion .................................................................. 11 Mission-Related Investments ............................................................................................ 11 Figures Figure 1. Market Shares by Lender of Total Farm Debt, 1960-2011 ............................................... 2 Figure 2. Market Shares of Real Estate Farm Debt, 1960-2011 ...................................................... 2 Figure 3. Market Shares of Non-Real Estate Farm Debt, 1960-2011 .............................................. 2 Figure 4. Farm Assets, 1960-2012 ................................................................................................... 4 Figure 5. Farm Debt, 1960-2012 ..................................................................................................... 4 Figure 6. Debt-to-Asset Ratio, 1960-2012 ....................................................................................... 4 Figure 7. Net Farm Income, 1960-2012........................................................................................... 4 Figure 8. Net Farm Income and Government Payments, 1960-2012 .............................................. 4 Figure 9. Debt-to-Net Farm Income Ratio, 1960-2012 ................................................................... 4 Figure 10. Delinquency Rates on Loans at Commercial Banks, 1990-2012 ................................... 6 Figure 11. Nonperforming Farm Loans, 1990-2012 ........................................................................ 6 Tables Table 1. Term Limits on Farm Service Agency Loans..................................................................... 9 Contacts Author Contact Information........................................................................................................... 13 Congressional Research Service Agricultural Credit: Institutions and Issues Current Situation Major Players and Market Shares The federal government has a long history of assisting farmers with obtaining loans for farming. This intervention has been justified at one time or another by many factors, including the presence of asymmetric information among lenders, asymmetric information between lenders and farmers, lack of competition in some rural lending markets, insufficient lending resources in rural areas compared to more populated areas, and the desire for targeted lending to disadvantaged groups (such as small farms or socially disadvantaged farmers).1 Several types of lenders make loans to farmers. Some are government entities or have a statutory mandate to serve agriculture. The one most controlled by the federal government is the Farm Service Agency (FSA) in the U.S. Department of Agriculture (USDA). It lends directly to farmers and also issues guarantees on loans made by commercial lenders to farmers who do not qualify for regular credit. Therefore, FSA is called a lender of last resort. Because FSA targets loans or reserves funds for disadvantaged groups, it also is called a lender of first opportunity. The lender with the next-largest amount of government intervention is the Farm Credit System (FCS). It is a cooperatively owned, but federally chartered, private lender with a statutory mandate to serve agriculture-related borrowers only. FCS makes loans to creditworthy farmers, and is not a lender of last resort, but is a government-sponsored enterprise (GSE). Third is Farmer Mac, another GSE that is privately held, and provides a secondary market for agricultural loans. FSA, FCS, and Farmer Mac are described in more detail later in this report. Other lenders do not have adirect government connection. These involvement in their funding or existence. These include commercial banks, life insurance companies, and individuals, merchants, and dealers. Figure 1 shows that commercial banks lendand the FCS provide most of the farm sector’s total debt (44%), followed by FCS (39%),credit (43.4%, and 42.8%, respectively), followed by individuals and others (96.0%), and life insurance companies (6 (5.3%). FSA provides about just over 2 about 2.5% of the debt through direct loans. FSA also guarantees about another 4%-5% of the market through loans that are made by commercial bank and the FCS. Total farm debt is split nearly evenly between real estate debt (54%) and non-real estate debt (46banks and the FCS. The total amount of farm debt ($254 billion in 2011) is concentrated relatively more in real estate debt (57%) than in non-real estate debt (43%). FCS is the largest lender for real estate loans, although both commercial banks’ and FCS’s shares have grown as others’ shares have decreased (Figure 2). commercial banks’ share is growing, and as of recently they hold nearly as much farm real estate debt as FCS (Figure 2). Commercial banks are the largest lender for non-real estate loans, and have been for nearly five decades (Figure 3). As the three although FCS has gained share in recent years as the share by individuals and others has decreased (Figure 3). As the figures show, market shares among these lenders have changed over time, with commercial banks holding. Commercial banks held relatively little farm real estate debt through 1985, but nearly as much as the FCS in 2008 now hold a sizeable amount (Figure 2). The share of real estate loans from “individuals and others” has steadily decreased over time, primarily from declining use of private contract for deed arrangements between farmland sellers and buyers. FSA held a much larger share of both the real estate and particularly non-real estate steadily decreased over time, with fewer private contracts for farm real estate and relatively less dealer financing in operating credits. FSA held a much larger share of farm debt during the farm financial crisis of the 1980s;, but that ratio declined as the farm economy improved after the early through the 1990s (Figure 3). 1 USDA-FSA, Evaluating the Relative Cost Effectiveness of the Farm Service Agency’s Farm Loan Programs, report to Congress, August 2006, pp. 11-17, at http://www.fsa.usda.gov/Internet/FSA_File/farm_loan_study_august_06.pdf. Congressional Research Service 1 Agricultural Credit: Institutions and Issues Figure 1. Market Shares by Lender of Total Farm Debt, 1960-2008 100% 9% Individuals and others 90% 6% 2% 80% Life ins. co. 70% USDA-FSA 44% 60% 50% Commercial banks 40% 30% 20% 39% Farm Credit System 10% 0% 1960 1970 1980 1990 20002011 Source: CRS, using USDA-ERS data at http://www.ers.usda.gov/Data/FarmBalanceSheet/fbsdmu.htm. Notes: In the graph, amounts for USDA-FSAdata-products/farm-income-and-wealthstatistics.aspx. Notes: FSA shares in the graph are for direct loans only. FSA also issues loan guarantees covering about 4% of the market on debt issued by-issued guarantees on about 4-5% of farm loans are not shown separately but are included in the shares of commercial banks and the Farm Credit System. Figure 2. Market Shares of Real Estate Farm Debt, 1960-20082011 Figure 3. Market Shares of Non-Real Estate Farm Debt, 1960-2008 (542011 (57% of total farm debt in 2008) (462011) (43% of total farm debt in 2008) 100% 100% Individuals and others 90% 70% Life ins. co. 70% 60% USDA-FSA 60% 502011) 100% 100% 90% 80% 70% 60% 50% 40% 30% 90% Life ins. co. USDA-FSA 70% Commercial banks 50% 90% 80% 40% 80% USDA-FSA Commercial banks 40% 30% 30% Farm Credit System 20% 10% 0% 1960 Individuals and others 1970 1980 1990 2000 Source: CRS using USDA-ERS data at http://www. ers.usda.gov/Data/FarmBalanceSheet/fbsdmu.htm. Congressional Research Service 20% Farm Credit System 10% 0% 1960 1970 1980 1990 2000 Source: CRS using USDA-ERS data at http://www. ers.usda.gov/Data/FarmBalanceSheet/fbsdmu.htm10% 1970 1980 1990 Source: CRS, using USDA-ERS data. Congressional Research Service Individuals and others 80% USDA-FSA 60% Commercial banks 40% 30% Farm Credit System 20% 0% 1960 Individuals and others 20% Farm Credit System 10% 2000 2010 0% 1960 1970 1980 1990 2000 2010 Source: CRS, using USDA-ERS data. 2 Agricultural Credit: Institutions and Issues The Farm Balance Sheet As a whole, the farm sector recorded a historically high level of farm assets in 2007, a total of $2.05 trillion. In the two years from then to the end of 2009, farm asset levels fell 5.4%, totaling $1.94 trillion at the end of 2009 (Figure 4). In 2010, USDA expects farm assets to fall another 3.5% to $1.88 trillion.farm sector assets have remained strong despite pressure on other real estate sectors. The value of farm assets contracted only in 2008 and has since returned positive growth. Farm assets reached a reached a new high in 2011, a total of $2.4 trillion, and were expected to rise 6.5% in 2012 (Figure 4). These highs in total farm assets now exceed the previous peak from 1980 in inflation-adjusted terms.2 Real estate is about 84% of the total amount of farm assets; machinery and vehicles are the next-largest category at about 6% of the total. 23 Farm debt reached a historic high of $249254 billion at the end of 2009, up 4.4% from $239 billion in 2008 (Figure 5)2011 (Figure 5). Debt was forecasted to rise 4.5% in 2012. In inflation-adjusted terms, however, this level of debt is still well below the levels at the peak of the 1980s. In 2010, USDA expects farm debt to fall 6.8% to $233 billion well below the peak debt levels of the 1980s. Debts and assets can be compared in a single measure by dividing debts by assets—the debt-toasset ratio. A lower debt-to-asset ratio generally implies less financial risk to the sector than a higher ratio. Farm debt-to-asset ratio levels have declined fairly steadily since the late 1980’s after 1980s after the farm financial crisis, and reached a historic low of 10.4% in 2007. However, as farm assets began to fall and debt continued to rise in recent years, the debt-to-asset ratio also began to rise, albeit to still comparatively low levels of 12%-13% (Figure 6). This indicates that farms, as a whole, are not as highly leveraged as they were going intoWhen farm asset growth paused in 2008-2009, the debt-to-asset ratio rose to nearly 12% (Figure 6). However, by 2012, the debt-to-asset ratio had returned to historically low levels. As a whole, farms are not as highly leveraged as they were in the farm financial crisis of the 1980s. Net farm income has become more variable, especially since 2000. After reaching historic highs in 2004, net farm income fell by a third in two years, through 2006 (Figure 7). After peaking again in 2008 at $8785 billion, net farm income fell by 35%one-quarter in one year to $5663 billion in 2009. USDA expects net farm income to rise by almost 12% in 2010 to $63 billion. 3 2009. New highs were set in 2011 and 2012. Despite the severe declines in farm income in 2006 and 2009, the low net farm income years in the past decade are relative recent lows in net farm income are still higher than the inflation-adjusted lows experienced during lows from the farm financial crisis of the 1980s.4 Government payments to farmers also have risen from decades ago, but do not always offset the variability in net farm income (Figure 8). Fixed direct payments that are not tied to prices or revenue are a large componentthe primary form of government payments in recent years; these payments support farm income but do not necessarily help farmers manage risks. Figure 8 shows that more of net farm income is coming from the market rather than the government, compared to the 1980s. Another indicator of farmers’ leverage compares debt to net farm income. A lower debt-to-income ratio (with the ratio expressing the number of years of current income that debt represents) implies less financial leverage and risk. The farm -debt-to-net farm -farm-income ratio is more variable than the debt-to-asset ratio because of the variability of net farm income. It reached a 35-year low of 2.1 in 2004 and rose to 4.4 in 2009 (Figure 9). The forecast for 2010 suggests it will fall to 3.7. These levels, 3.8 in 2009 before falling again to 2.2 in 2011 (Figure 9). These levels, while more variable than in the 1990s, are roughly within historical levels, and certainly less than from 1976 to1986. 250-year historical levels between 2 and 4, and are certainly less than from 1976 to 1986 (a period surrounding the 1980s financial crisis). 2 Comparisons are made to conditions in the 1980s because that was the last major financial crisis in agriculture. USDA, Economic Research Service. “Farm Sector Income Forecast,” February 11, 2010January 28, 2011, at http://www.ers.usda.gov/ Briefing/FarmIncome/Data/Bs_t5.htm. 34 For more information on farm income expectations, see CRS Report R40152, U.S. Farm Income, by Randy Schnepf. 3 Congressional Research Service 3 Agricultural Credit: Institutions and Issues Figure 4. Farm Assets, 1960-2010 Figure 5. Farm Debt, 1960-2010 Billion dollars 400 Billion dollars 2,500 Farm assets Farm debt 350 in 2010 dollars 2,000 in 2010 dollars 300 250 1,500 200 1,000 150 100 500 50 0 1960 1970 1980 1990 2000 2010 0 19602012 Source: CRS, using USDA-ERS data at http://www. ers.usda.gov/Briefing/FarmIncome/Data/Constantdollar-table.xls. 2009 prelim.; 2010 forecast..data-products/farm-income-and-wealthstatistics.aspx. 2012 forecast. Figure 6. Debt-to-Asset Ratio, 1960-2010 1970 1980 1990 2000 20102012 Source: CRS, using USDA-ERS data at http://www. ers.usda.gov/Briefing/FarmIncome/Data/Constantdollar-table.xls. 2009 prelim.; 2010 forecast.. Figure 7. Net Farm Income, 1960-2010 25% Billion dollars 140 20% 120 Net farm income in 2010 dollars 100 15% 80 60 10% 40 5% 20 0% 1960 1970 1980 1990 2000 2010 0 1960data-products/farm-income-and-wealthstatistics.aspx. 2012 forecast. Figure 8. Net Farm Income and Government Payments, 1960-2012 Source: CRS, using USDA-ERS data at http://www. ers.usda.gov/Briefing/FarmIncome/Data/Constantdollar-table.xls. 2009 prelim.; 2010 forecast.. Figure 8. Net Farm Income and Government Payments, 1960-2010 Billion dollars 100 1970 1980 1990 2000 2010data-products/farm-income-and-wealthstatistics.aspx. 2012 forecast. Congressional Research Service Figure 5. Farm Debt, 1960-2012 Source: CRS, using USDA-ERS data at http://www. ers.usda.gov/Briefing/FarmIncome/Data/Constantdollar-table.xls. 2009 prelim.; 2010 forecast.. Figure 9. Debt-to-Net Farm Income Ratio, 1960-2010 14 Net farm income Government payments 90 80 12 10 70 8 60 50 6 40 30 4 20 2 10 0 1960 1970 1980 1990 2000 2010 Source: CRS, using USDA-ERS data at http://www. ers.usda.gov/Briefing/FarmIncome/Data/Constantdollar-table.xls. 2009 prelim.; 2010 forecast.. Congressional Research Service 0 1960 1970 1980 1990 2000 2010data-products/farm-income-and-wealthstatistics.aspx. 2012 forecast. Figure 7. Net Farm Income, 1960-2012 Source: CRS, using USDA-ERS data at http://www. ers.usda.gov/data-products/farm-income-and-wealthstatistics.aspx. 2012 forecast. Figure 9. Debt-to-Net Farm Income Ratio, 1960-2012 Source: CRS, using USDA-ERS data at http://www. ers.usda.gov/Briefing/FarmIncome/Data/Constantdollar-table.xls. 2009 prelim.; 2010 forecast..data-products/farm-income-and-wealthstatistics.aspx. 2012 forecast. 4 Agricultural Credit: Institutions and Issues Agricultural Lending in the Global Financial CrisisSituation and Challenges While the global financial crisis was slower to affect the balance sheets of farmers and agricultural lenders than the housing market, it has begun to take its toll. In 2007 and 2008, farm commodity prices were particularly high, supporting farm income at above-average levels. But since the historic high prices in the summer of 2008, farm commodity prices have fallen and reduced farm income in 2009 and 2010. Net farm income fell by 35% in 2009 to $56 billionits presence was observed in agricultural lending. Credit standards were tightened (more documentation and oversight of loans was required) and lenders sometimes made less credit available to producers. As the lender of last resort, the USDA Farm Service Agency experienced significantly higher demand for its direct loans and guarantees. In 2007, 2008, and 2010, farm commodity prices were particularly high, supporting farm income at above-average levels. But in 2006 and 2009, net farm income fell by about one-third (Figure 7), reducing some farmers’ ability to repay loans, particularly in some farm sectors such as dairy, hogs, and poultry. But USDA expects net farm income to rebound by almost 12% in 2010 to $63 billion (Figure 7). Delinquencies and Nonperforming Loans hogs, and poultry. Recent strong farm income has improved most farmers’ ability to repay loans. Delinquency rates on residential mortgages began to rise in 2005, and for all loans particularly in 2007. Delinquencies include loans that are 30 days or more past due and still accruing interest, as well as those in nonaccrual status. The delinquency raterates on residential mortgages and all loans has continued to rise without yet reaching a peak appear to have reached a peak in mid-2010 (11.3% for residential mortgages and 7.43% for all commercial bank loans as of March 31, 2010, Figure 10). But theThe delinquency rates for agricultural loans did not begin to rise until mid-2008, after continuing to fall to historic lows while delinquencies were rising in residential mortgages and other loans. Moreover, the rate of increase in delinquencies on farm production loans at commercial banks has not been as sharp as in non-farm sectors, reaching a peak of 3.1% in December 2009, before falling to 2.89% in March 2010.4 in the non-farm sectors, and appears to have peaked in September 2010 at 3.5%. Delinquency rates on farm production loans at commercial banks have since returned to near-historic lows below 2%.5 A more severe measure of loan performance is nonperforming loans. Nonperforming loans include nonaccrual loans and accruing loans 90 days or more past due. These loans are more in jeopardy than delinquent loans, and represent a smaller subset of loans. Within the agricultural loan portfolio, FCS nonperforming loans rose from 0.434% at the beginning of 2008 to a near-term peak of 2.788% on September 30, 2009, before moderating to 2.44% as of March 31, 2010 (Figure 11). Thedecreasing again to about 1.7% as of September 30, 2012 (Figure 11).6 Nonetheless, the FCS nonperforming loan rate isremains at a level not seen since the mid-1990s,1990s when the system had finally recovered from the farm financial crisis of the 1980s.5 Nonperforming farm loans at commercial banks also have risen. Nonperforming farm real estate loans at commercial banks rose from a low of 0.667% in December 2006 to 2.69% in March 2010. 2011, before declining to 2.2% as of September 30, 2012. Nonperforming farm production loans rose from a low of 0.646% in December 2006 to 2.374% in March 2010 (Figure 11). 6 4 March 2010, before declining to 1.3% as of September 30, 2012 (Figure 11).7 5 Federal Reserve Bank, “Delinquency Rates on Loans at Commercial Banks” (seasonally adjusted), at http://www. federalreserve.gov/releases/chargeoff. 56 Federal Farm Credit Banks Funding Corporation, “First Quarter 2010 Quarterly Information Statement of the Farm Credit System,” p. 9, May 10, 2010, at http://www.farmcredit-ffcb.com/farmcredit/serve/public/finin/quarin/report.pdf? assetId=155241. 67 Federal Reserve Bank, Agricultural Finance Data Book, Tables B.2 and B.4, at http://www.federalreserve.gov/ releases/e15/default.htmkansascityfed.org/ research/indicatorsdata/agfinance/index.cfm. Congressional Research Service 5 Agricultural Credit: Institutions and Issues Figure 10. Delinquency Rates on Loans at Commercial Banks, 1990-2010 12% Single-family residential 11% 10% 9% 8% All loans 7% 6% 5% 4% 3% 2% Farm production loans 1% 0% 1990 1995 2000 2005 20102012 Source: Compiled by CRS. Data are through March 31, 2010,through September 30, 2012, using Federal Reserve Bank, “Delinquency Rates on Loans at Commercial Banks” (seasonally adjusted), at http://www.federalreserve.gov/releases/chargeoff. Notes: Delinquencies include loans that are 30 days or more past due and still accruing interest, as well as those in nonaccrual status. The amounts are percentages of end-of-period loans. Figure 11. Nonperforming Farm Loans, 1990-2010 5% 4% Farm Credit System 3% Commercial bank farm real estate 2% 1% 0% 1990 Commercial bank farm production 1995 2000 2005 2010 Source: Compiled by CRS. Data are through March 31, 2010. FCS data from Federal Farm Credit Banks Funding Corp. at 2012 Source: Compiled by CRS. Federal Farm Credit Banks Funding Corp. data through September 30, 2012, at http://www.farmcredit-ffcb.com. Commercial bank data from Federal Reserve Bank, Agricultural Finance Data Book, Tables B.2 and B.4, at http://www.federalreserve.gov/releases/e15/default.htm. Notes: Nonperforming loans include nonaccrual loans and accruing loans 90 days or more past due. The amounts are percentages of total loans. Congressional Research Service 6 Agricultural Credit: Institutions and Issues Challenges Facing Agricultural Lenders Agricultural lenders face challenges like other banks in accessing capital. While some independent rural banks may be less affected than urban money center banks, the rural banks are not immune to the crisis. For example, the Farm Credit System—a private entity but still a government-sponsored enterprise—is very dependent on the bond market and has felt the shock of the financial crisis in its ability to sell bonds to fund its loans. Although its bonds are still creditworthy and able to be sold, the terms of FCS’s bond sales reflect the change and turmoil in the financial markets. Rural community banks, most of which are not directly involved with the failing entities and investments of the money-center banks, can end up with less funding available for loans when regulators increase capital holding requirements as a result of macro-level risks. The financial crisis and stock market losses have affected agricultural lenders in unexpected ways, as illustrated by two examples. In the fall of 2008, Farmer Mac—the secondary market for agricultural loans and another GSE—lost $106 million on investments in Fannie Mae stock and Lehman Brothers securities. These losses reduced Farmer Mac’s capital and jeopardized its ability to meet statutory capital requirements. Farmer Mac raised $124 million in capital in 2008 by issuing the same amounts of preferred stock. Management issues also were addressed by replacing the chief executive officer. In 2009, Farmer Mac successfully rebuilt its capital position. In April 2009, the 11th-largest farm lender among commercial banks7—New Frontier Bank in Greeley, Colorado, with a $780 million agricultural loan portfolio—failed, leaving many farmers in northeastern Colorado scrambling to find new lenders for their operating loans. While this has not been the only bank failure, it was particularly noteworthy given the concentration and size of the bank’s agricultural loans, and its impact on other lenders such as FCS and FSA that were solicited to take over some of the loans. As a consequence of the global financial crisis, agricultural lenders tightened credit standards in 2009 and 2010—at a minimum requiring more documentation and oversight of loans, and possibly making or having less credit available to producers. Thus, because of this turmoil and as the lender of last resort, the USDA Farm Service Agency has experienced significantly higher demand for its direct loans and guarantees. By May 2009, the demand for direct farm operating loans (the loans farmers use to buy seed, fertilizer, and fuel to plant a crop) was up 81% over a year earlier, demand for direct ownership loans (loans for real estate) was up 132%, and demand for guaranteed operating loans was up 31%.8 Two supplemental appropriations during FY2009 added more than $1.1 billion of loan authority to $3.4 billion of loan authority in the regular appropriation (Table 1), making a total of $4.5 billion of FSA loans or guarantees available in FY2009—the highest since 1985. The regular FY2010 agriculture appropriation provided even more, $5.1 billion of loan authority and guarantees. Additional loan authority for FY2010 is contemplated in a pending supplemental appropriation (H.R. 4899, discussed later) that could add $950 million for a possible total loan authority in FY2010 of $6 billion. 7 American Bankers Association, “Top 100 Farm Bank Lenders by Dollar Volume in 2008,” at http://www.aba.com/ NR/rdonlyres/05858407-284E-46CD-9443-38EB9601A25A/58849/Top100FarmBanksbyDollarVolumein2009.pdf. 8 Doug Caruso, FSA Administrator, in testimony before the House Agriculture Subcommittee on Conservation, Credit, Energy, and Research, June 11, 2009, at http://agriculture.house.gov/testimony/111/h061109sc/Caruso.doc. Congressional Research Service 7 Agricultural Credit: Institutions and Issues Review of Farm Loan Restructuring Section 501 of the Helping Families Save Their Homes Act (P.L. 111-22) required the Congressional Oversight Panel (COP) to write a report that analyzed the extent to which commercial banks receiving Troubled Asset Relief Program (TARP) funds could or should be required to use loan restructuring rather than foreclosure to address problem farm loans. The analysis was to include comparisons to FSA’s direct loan restructuring program (7 U.S.C. 2001), FCS’s loan restructuring options, and the Treasury’s Making Home Affordable Program. The impetus to write the report came from an amendment (S.Amdt. 1032) by Senators Feingold and Gillibrand that, as initially proposed, would have compelled TARP recipients to offer farm loan borrowers “a restructuring program comparable to the terms and conditions of the program established … [for the USDA farm loan program] (7 U.S.C. 2001).”9 The original amendment also had provisions for the terms of shared appreciation agreements, future borrower eligibility, and protections for the farmer’s principal residence. However, the amendment was revised and the adopted version did not compel farm loan restructuring, but instead required only the COP report mentioned above. The Congressional Oversight Panel report10 found that the effects of a restructuring mandate for TARP recipient banks would have limited reach and impact for the farm sector. The report found that TARP-recipient banks hold only about 10% of total farm real estate debt. The COP suggested that Congress could help struggling farmers by creating a more encompassing, voluntary restructuring program funded through TARP, or creating a TARP-funded loan guarantee program for restructured farm loans, since the demand for FSA loan guarantees nearly always exceeds the supply. The report also noted that farm credit data—especially for farm foreclosures—are inadequate compared to other parts of the banking sector, and that the existing data (e.g., on delinquencies and nonperforming loans, as in Figure 10 and Figure 11) should be monitored closely to track the direction of trends in problem farm loans. The benchmark in the Feingold/Gillibrand amendment was the USDA loan restructuring program that is required in statute. The farm loan restructuring provisions for the USDA farm loan program are largely a result of the farm loan crisis of the 1980s, and are designed to provide borrower rights and keep family farmers on their farms if at all financially possible. As a government lender, USDA generally does not want to foreclose on farms, especially considering the visibility of the government being the entity to take away a sometimes generations-old family farm and homestead. Applying government-lending provisions directly to commercial lenders may not necessarily be appropriate, given the differing business goals of their respective lending programs. 9 Congressional Record, p. S5028, May 1, 2009. Congressional Oversight Panel, Special Report on Farm Loan Restructuring, July 21, 2009, at http://cop.senate.gov/ documents/cop-072109-report.pdf. 10 Congressional Research Service 8 Agricultural Credit: Institutions and Issues through September 30, 2012, at http://www.kansascityfed.org/research/indicatorsdata/agfinance/index.cfm. Notes: Nonperforming loans include nonaccrual loans and accruing loans 90 days or more past due. The amounts are percentages of total loans. Congressional Research Service 6 Agricultural Credit: Institutions and Issues Description of Government-Related Farm Lenders USDA’s Farm Service Agency (FSA) USDA’s Farm Service Agency is a lender of last resort because it makes direct farm ownership and operating loans to family-sized farms that are unable to obtain credit elsewhere.8 FSA also guarantees timely payment of principal and interest on qualified loans made by commercial lenders such as commercial banks and FCS. Permanent authority exists in the Consolidated Farm and Rural Development Act (CONACT, 7 U.S.C. 1921 et seq.). Prior to the banking crisis in 2008, FSA usually made and guaranteedFSA usually makes and guarantees about $3.5 billion of farm loans annually. However, because of the heavier demand for FSA loansSupplemental appropriations during the financial crisis, FSA has received supplemental appropriations and a higher regular FY2010 appropriation. Its regular FY2010 appropriation is $141 million to support $5.1 billion of loans. FSA also received $321 million in salaries and expenses to administer the loan program. raised FSA loan activity to about $6.0 billion in FY2010. In FY2012, appropriations supported about $4.8 billion of FSA direct loans and guarantees.9 Direct loans are limited to $300,000 per borrower, guaranteed loans to $1,094302,000 per borrower (adjusted annually for inflation). Direct emergency loans are available for natural or other disasters. Some guaranteed loans have a subsidized interest ratedisasters. Part of the FSA loan program is reserved for beginning farmers and ranchers (7 U.S.C. 1994 (b)(2)). For direct loans, 75% of the funding for farm ownership loans and 50% of operating loans are reserved for the first 11 months of the fiscal year. For guaranteed loans, 40% is reserved for ownership loans and farm operating loans for the first half of the fiscal year. Funds are also targeted to “socially disadvantaged” farmers by race, gender, and ethnicity (7 U.S.C. 2003). Because of these provisions, FSA also is known as lender of first opportunity for borrowers who are not yet creditworthy for regular commercial business loans. Farm Credit System (FCS) Congress established the Farm Credit System in 1916 to provide a dependable and affordable source of credit to rural areas at a time when commercial lenders avoided farm loans. FCS is neither a government agency nor guaranteed by the U.S. government, but is a network of borrower-owned lending institutions operating as a government-sponsored enterprise (GSE). It is not a lender of last resort; it is a for-profit lender with a statutory mandate to serve agriculture. Funds are raised through the sale of bonds on Wall Street. Five10 Four large banks allocate these funds to 95 to 86 credit associationsassociations11 that, in turn, make loans to eligible creditworthy borrowers. FCS is unique unique among the GSEs because it is a retail lender making loans directly to farmers, and thus is in direct competition with commercial banks. Statutes and oversight by the agriculture committeesHouse and Senate Agriculture Committees determine the scope of FCS activity. Benefits such as tax exemptions are alsoalso are provided. Eligibility is limited to farmers, farm input suppliers, rural homeowners in towns under 2,500 population, and cooperatives. The federal federal regulator is the Farm Credit Administration (FCA). For more background, see CRS Report RS21278, Farm Credit System, by Jim Monke. Congressional Research Service 9 Report RS21278, Farm Credit System. 8 U.S. Department of Agriculture, Farm Service Agency, Farm Loan Program, at http://www.fsa.usda.gov/dafl. CRS Report R42596, Agriculture and Related Agencies: FY2013 Appropriations. 10 Federal Farm Credit Banks Funding Corporation, “Overview,” http://www.farmcreditfunding.com/ffcb_live/ overview.html. 11 Farm Credit Administration, “Number of FCS Banks and Associations,” at http://www.fca.gov/info/ number_of_fcs_institutions.html. 9 Congressional Research Service 7 Agricultural Credit: Institutions and Issues Farmer Mac Farmer Mac is a separate GSE that is a secondary market for agricultural loans.12 It is related to the the FCS in that FCA is its regulator and it was created by the same legislation, but it is a financially financially separate entity. Farmer Mac purchases mortgages from lenders and guarantees mortgage-backed securities that are bought by investors. Permanent authority rests in the Farm Credit Act of 1971 (12 U.S.C. 2001 et seq.). 2008 Farm Bill ProvisionsIssues for Congress Credit Title in the Next Farm Bill Statutory authority for FSA and FCS is permanent, but periodic farm bills—such as the 2008 farm bill (P.L. 110-246)— often make adjustments to eligibility criteria and the scope of operations. The most recent farm bill adjustments are summarized below, and a more detailed side-by-side comparison of provisions is available in CRS Report RL34696, The 2008 Farm Bill: Major Provisions and Legislative Action, coordinated by Renée Johnson. Farm Service Agency The 2008 farm bill authorizes the FSA farm loan program at $4.226 billion for each of FY2008FY2012, including $1.2 billion for direct loans. Actual funding is determined in annual appropriations acts. In addition, the 2008 farm bill makes several changes: • It increases lending limits per farmer to $300,000 for direct farm ownership loans and $300,000 for direct operating loans, up from $200,000 each. • It further prioritizes lending for beginning and socially disadvantaged farmers by increasing the amounts reserved for these groups (see earlier description of FSA). • It extends the term of the beginning farmer down-payment loan program, raises the lending limit, and lowers the interest rate. It adds eligibility for socially disadvantaged farmers. • It makes permanent and nationwide the guarantee program for seller-financed land loans to beginning and socially disadvantaged farmers. • It extends eligibility for emergency loans to equine farmers; conferees noted that horses for racing, showing, and recreation should not be eligible. • It creates a beginning farmer “Individual Development Account” pilot program. Farmers receive up to a 2:1 match, up to $6,000/year. • It creates direct loans and loan guarantees for conservation projects. • It extends the right of first refusal to reacquire a homestead property to the family of a socially disadvantaged borrower-owner. • It adds socially disadvantaged farmers to beginning farmers as preferred groups when the USDA sells or leases property. • It suspends until December 31, 2010, the enforcement of the 15-year “term limit” on guaranteed operating loans that requires farmers to graduate to commercial lenders. A further extension is discussed in the section on “Issues for Congress.” Congressional Research Service 10 Agricultural Credit: Institutions and Issues Farm Credit System The enacted 2008 farm bill does not allow any expansion of FCS lending authority. Although an initial House draft of the farm bill included some expanded lending authorities, those provisions were removed by a floor amendment from leaders of the House Financial Services Committee (H.Amdt. 702). For the FCS, the enacted 2008 farm bill makes the following provisions: • It allows rural utility (electric or telephone facility) loans to qualify for the agricultural mortgage secondary market (Farmer Mac). It provides for separate consideration of rural utility loans when determining credit risk. • It makes technical changes in the payment of insurance premiums by FCS banks to the FCS Insurance Corporation. • It makes more borrowers able to own Bank for Cooperatives voting stock. • It equalizes lending authorities for associations in Alabama, Mississippi, and Louisiana by allowing Federal Land Bank Associations to make shorter-term loans, and Production Credit Associations to make longer-term loans. It requires board and shareholder votes. These provisions are effective as of January 1, 2010. Issues for Congress Supplemental Appropriations for USDA Farm Loans An FY2010 supplemental appropriation is proposed for farm loans to respond to the continued heavy demand for loans and a projected shortage of appropriated loan authority. Both the Houseand Senate-passed versions of H.R. 4899 (a war and disaster supplemental appropriations bill) would provide identical funding for USDA’s Farm Service Agency to issue an additional $950 million in loans and guarantees (on top of a nearly exhausted FY2010 base of $5.1 billion, Table 1). This additional loan authority would cost $32 million in budget authority ($31 million for loan subsidy plus $1 million for administrative expenses, on the FY2010 loan subsidy base of $141 million). The House and Senate are trading amendments on the bill to resolve differences on other provisions (rather than using a conference committee).11 As the lender of last resort, FSA experienced significantly higher demand for its loans beginning in FY2009 during the banking crisis. In 2009, an unusually high number of direct operating loan applications were from new customers: 45% in 2009, compared with about 20% usually.12 11 For more information on the supplemental appropriation, see CRS Report R41255, FY2010 Supplemental Appropriations for Agriculture, by Jim Monke. Other agricultural programs also would receive supplemental appropriations in the bills. 12 Doug Caruso, FSA Administrator, in testimony before the House Agriculture Subcommittee on Conservation, Credit, Energy and Research, June 11, 2009, at http://agriculture.house.gov/testimony/111/h061109sc/Caruso.doc. Congressional Research Service 11 Table 1. USDA Farm Loans in Enacted FY2009-FY2010 Appropriations and Proposed FY2010 Supplemental Appropriations (dollars in millions) FY2010 FY2009 Regular (P.L. 111-8) FSA Farm Loan Program Budget Authority Loan Authority Supplemental (P.L. 111-5, and P.L. 11132) and USDA internal transfer Budget Authority Loan Authority Regular (P.L. 111-80) Budget Authority Loan Authority Change Supplemental (House-passed and Senate-passed bill H.R. 4899) Budget Authority Loan Authority FY2010 Total minus FY2009 Total Budget Authority Loan Authority Farm ownership loans Direct 13 222 4 1,239 Direct 68 575 81 Guaranteed (unsubsidized) 25 1,017 Guaranteed (interest assistance) 37 270 Guaranteed 23 360 27 650 -9 68 6 1,500 1 300 3 561 683 47 1,000 17 350 -84 92 5 193 35 1,500 6 250 11 539 -17 -120 24 170 7 50 10 70 0 4 0 0 Farm operating loans Indian tribe land acquisition 0.2 4 Indian highly fractured land loans Boll weevil eradication loans 0.8 0 100 0 10 0.8 100 10 0 0 Conservation loans Direct 1.1 75 1.1 75 Guaranteed 0.3 75 0.3 75 Subtotal, FSA Farm Loan Program Salaries and expenses Administrative expenses Total, FSA Farm Loan Program 147 3,428 92 1,117 141 5,084 309 — 313 — 8 — 8 — 465 3,428 92 1,117 462 5,084 31 1 32 950 — 950 -68 1,490 4 — 1 — -63.2 1,490 Source: Compiled by CRS from P.L. 111-5; P.L. 111-8; P.L. 111-32; P.L. 111-80; H.R. 4899; H.Res. 1500; and USDA Farm Service Agency, ”Funding,” at http://www.fsa.usda.gov/FSA/webapp?area=home&subject=fmlp&topic=fun. Does not include $75 million of budget authority proposed for emergency loans for poultry producers in H.R. 4213. Notes: Budget authority reflects the cost of making loans, such as interest subsidies and default. Loan authority reflects the amount of loans that FSA may make or guarantee. CRS-12 Agricultural Credit: Institutions and Issues In FY2010, USDA continues to experience higher loan demand, since some commercial lenders continue to constrain their own lending practices and some farmer families are losing off-farm jobs. Some USDA farm loan offices in the states have begun to deplete their FY2010 allocation to make loans. Nationally, some loan programs have used over 90% of the their fiscal year allocation in eight months. 13 Regular appropriated loan authority for USDA increased 48% from FY2009 to FY2010, and supplemental appropriations are increasing these amounts each year. The regular FY2009 level for farm loans included $3.4 billion of loan authority (direct loans and guarantees), typical of recent years. Two supplemental appropriations in FY2009 added over $1.1 billion in loan authority, for a total of $4.5 billion of loans in FY2009 (Table 1). Term Limits on USDA Farm Loans Following the farm credit crisis of the 1980s, Congress added “term limits” to the USDA farm loan program to restrict eligibility for government farm loans and encourage farmers to “graduate” to commercial loans. The term limits place a maximum number of years that farmers are eligible for certain types of FSA loans or guarantees. However, Congress has suspended application of one of the term limits to prevent some farmers from being denied credit. Farm Operating Loans • Direct operating loans are limited to a seven-year period. In certain cases, borrowers may qualify for a one-time, two-year extension (7 U.S.C. 1941(c)(1)(C) and (c)(4)). In June 2009, USDA said that about 4,800 FSA borrowers are limited to one more year of direct operating loans, and another 7,800 borrowers are limited to two more years. USDA does not expect many of these borrowers to graduate to commercial credit in the current financial environment.14 • Guaranteed operating loans are limited to a 15-year period (7 U.S.C. 1949(b)(1)), but that limit is suspended until December 31, 2010, by Section 5103 of the 2008 farm bill (P.L. 110-246). Receiving direct operating loans counts toward the guaranteed loan term limit. That is, when either the first direct or guaranteed operating loan is issued, the clock starts on the 15-year eligibility for guaranteed operating loans. USDA said in June 2009 that 3,800 current borrowers have reached the guaranteed term limit and would not qualify for additional loan guarantees if the term limits were not suspended.15 Suspension of term limits on guaranteed operating loans is not new. The 2002 farm bill made a similar suspension of term limits for nearly the life of the 2002 farm bill. However, because the current suspension does not last for the entire life of the 2008 farm bill, it may receive congressional attention by the end of the 111th Congress, and a bill is proposed in to extend it. 13 USDA posts updated data on available funds remaining in the farm loan program at http://www.fsa.usda.gov/FSA/ webapp?area=home&subject=fmlp&topic=fun. 14 Doug Caruso, FSA Administrator, in testimony before the House Agriculture Subcommittee on Conservation, Credit, Energy and Research, June 11, 2009, at http://agriculture.house.gov/testimony/111/h061109sc/Caruso.doc. 15 Ibid. Congressional Research Service 13 Agricultural Credit: Institutions and Issues In the Senate, S. 3221 would extend the suspension of term limits on guaranteed operating loans for two more year until December 31, 2012. This would allow the issue to wait to be addressed again until the next farm bill. The bill has not received committee or floor action. A similar bill in 2006 passed the Senate by unanimous consent and the House by voice vote (P.L. 109-467). Farm Ownership Loans • A borrower is eligible for direct farm ownership (real estate) loans for a maximum of 10 years after the first loan is made (7 U.S.C. 1922(b)(1)(C)). • There is no time limit on eligibility for guaranteed farm ownership loans.16 Agricultural Mediation Grants Farmers’ use of mediation services has increased because of the financial crisis and debt repayment problems. The USDA Farm Service Agency has a state mediation grant program that provides matching grants to organizations in the states (for example, cooperative extension services). The program provides mediation services not only for credit disputes (between farmers and USDA or other lenders), but also for other farm- and conservation-related disputes. Mediation through an impartial third party is a voluntary alternative to litigation, arbitration, or formal appeals. The program was begun in 1988 as one response to the 1980s farm financial crisis. FSA has approved 32 participating states17 for the Certified State Agricultural Mediation Program.18 The program has received funds annually through the Agriculture appropriations bill. In FY2010, it received $4.4 million. It is authorized through the end of FY2010, and has been reauthorized on a five-year cycle since its inception. To reauthorize the program, the House passed H.R. 3509 on March 18, 2010. The bill would reauthorize the program for five years through FY2015. An identical bill, S. 1375, was introduced in the Senate in June 2009, but has not received action. Farm Credit Administration Proposed Rule on Investments Although the 2008 farm bill did not change FCS’s scope of lending authority, the FCS is seeking through regulatory action to expand its list of permissible investments (currently a proposed rule, but not yet finalized). The expansion of investment opportunities would allow FCS to assist rural communities to expand infrastructure and housing facilities, as well as allowing other rural activities such as with rural business investment companies. 16 USDA-FSA, Evaluating the Relative Cost Effectiveness of the Farm Service Agency’s Farm Loan Programs, Report to Congress, August 2006, p. 76, at http://www.fsa.usda.gov/Internet/FSA_File/farm_loan_study_august_06.pdf. 17 Alabama, Arizona, Arkansas, California, Colorado, Florida, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New York, North Dakota, Oklahoma, South Dakota, Texas, Utah, Virginia, Washington, Wisconsin, and Wyoming. 18 For more information, see http://www.fsa.usda.gov/FSA/webapp?area=home&subject=oued&topic=ops-am. Congressional Research Service 14 Agricultural Credit: Institutions and Issues to eligibility criteria and the scope of operations. A new farm bill is expected in 2013, and provisions may be modeled on proposals included in proposals in the House and Senate during 2012, as summarized below.13 In the 112th Congress, both the Senate-passed farm bill (S. 3240) and the House-reported farm bill (H.R. 6083) would have made relatively small policy changes to USDA’s credit programs in Title V. Both bills would have given USDA discretion to recognize (1) alternative legal entities to qualify for farm loans and (2) alternatives to meet a three-year farming experience requirement; and both bills would have increased the maximum size of down-payment loans (from 45% of $500,000 to 45% of $667,000). The Senate farm bill would have updated and modernized the ConAct’s statutory language and organized the various programs into separate subtitles. It also would have extended the number of years that farmers could remain eligible for direct farm operating loans, and eliminated term limits on guaranteed operating loans (discussed in the next section). The House bill’s credit title would not have restructured the ConAct nor changed any term limits provisions. However, the House bill would have created a new microloan program, increased the percentage of a conservation loan that can be guaranteed, and added another lending priority for beginning farmers. Neither H.R. 6083 nor S. 3240 made any changes to Farm Credit System statutes. Term Limits on USDA Farm Loans Congress added “term limits” to the USDA farm loan program in 1992 and 1996 to restrict eligibility for government farm loans and encourage farmers to “graduate” to commercial loans. The term limits place a maximum number of years that farmers are eligible for certain types of FSA loans or guarantees. However, until the end of 2010, Congress had suspended application of one of the term limits to prevent some farmers from being denied credit (Table 1). 12 Federal Farm Credit Banks Funding Corporation, “FarmerMac,” at http://www.farmcredit-ffcb.com/farmcredit/ fcsystem/overview_farmer_mac.jsp 13 For more background and comparison of proposals, see CRS Report R42552, The 2012 Farm Bill: A Comparison of Senate-Passed S. 3240 and the House Agriculture Committee’s H.R. 6083 with Current Law. Congressional Research Service 8 Agricultural Credit: Institutions and Issues Farm Operating Loans • Direct operating loans are limited to a six-year period. In certain cases, borrowers may qualify for a one-time, two-year extension (7 U.S.C. 1941(c)(1)(C) and (c)(4)).14 • Guaranteed operating loans are limited to a 15-year period (7 U.S.C. 1949(b)(1)). Receiving direct operating loans counts toward the guaranteed loan term limit. That is, when either the first direct or guaranteed operating loan is issued, the clock starts on the 15-year eligibility for guaranteed operating loans. However, until December 31, 2010, the term limit had been suspended by the 2008 farm bill (P.L. 110-246, Section 5103). But following the expiration of the suspension, the 15-year term limit on guaranteed operating loans now applies.15 In the 112th Congress, the Senate-passed farm bill proposal (S. 3240) would have extended to 7 years the time that farmers could remain eligible for direct farm operating loans, and eliminated the 15-year term limit on guaranteed operating loans. The House-reported farm bill proposal (H.R. 6083) would not have changed the term limit statutes. Farm Ownership Loans • A borrower is eligible for direct farm ownership (real estate) loans for a maximum of 10 years after the first loan is made (7 U.S.C. 1922(b)(1)(C)). • There is no time limit on eligibility for guaranteed farm ownership loans.16 Table 1. Term Limits on Farm Service Agency Loans Maximum number of years that farmers are eligible for loans Type of FSA Loan Farm Operating (OL) Loans Farm Ownership (FO) Loans Direct loans term limits Guaranteed loans term limits 6 years, plus possible 2-yr. extension 15 years 10 years No term limit Was suspended (term limit not enforced) through 12/31/10. About 1,600 borrowers needed suspension to remain eligible. Source: CRS, based on statute and unpublished USDA data. Note: Term limits are separate from the maximum maturity or duration of an individual loan, which may be as long as 40 years for a farm ownership loan or as short as 1 year for a farm operating loan. 14 In June 2009, USDA said that about 4,800 FSA borrowers were limited to one more year of direct operating loans, and another 7,800 borrowers were limited to two more years. USDA did not expect many of these borrowers to graduate to commercial credit (Doug Caruso, FSA Administrator, in testimony before the House Agriculture Subcommittee on Conservation, Credit, Energy and Research, June 11, 2009, at http://agriculture.house.gov/testimony/ 111/h061109sc/Caruso.doc). 15 In December 2010, USDA said that about 1,600 current borrowers had reached the guaranteed term limit and would not qualify for additional operating loan guarantees (personal communication with House Agriculture Committee and USDA farm loan staff, December 2010). 16 USDA-FSA, Evaluating the Relative Cost Effectiveness of the Farm Service Agency’s Farm Loan Programs, Report to Congress, August 2006, p. 76, at http://www.fsa.usda.gov/Internet/FSA_File/farm_loan_study_august_06.pdf. Congressional Research Service 9 Agricultural Credit: Institutions and Issues Loans to Small and Local and Regional Food Producers Access to sufficient credit has been raised as one factor in the growth and expansion of local and regional food production systems.17 Because some of these farms are small and may produce in nontraditional settings, or the farmers do not have much farming experience, they may find it hard to qualify for regular production credit and may be ineligible for existing government loan programs. Several bills were introduced in the 112th Congress to expand the availability of credit for small and local and regional food producers.18 • H.R. 3286 and S. 1773 (the Local Farms, Food, and Jobs Act) would have explicitly recognized local and regional food producers as eligible borrowers at both USDA-Farm Service Agency and the Farm Credit System. Eligibility for FSA loans would have included local and regional food producers engaged in direct-to-consumer marketing, direct-to-institution marketing, direct-to-store marketing, and certain value-added agricultural products. Separately, the bill would have clarified that the mission of the FCS includes local and regional food production and distribution, especially by young, beginning, and small farmers. • H.R. 3236 (the Beginning Farmer and Rancher Opportunity Act) would have created a microloan program for smaller, nontraditional, and niche-type farms, such as specialty crop producers and community-supported agriculture operations. A microloan provision was included in the House-reported farm bill proposal, H.R. 6083. (The bill also included other general agricultural credit provisions, many of which were included in the House farm bill.) • H.R. 4351 (the Let’s Grow Act) would have created a loan program for local farm businesses and garden projects, with focuses on small and socially disadvantaged farms, food deserts, sustainable agriculture, nutrition education, and community development. Private lending entities would apply for program funding and relend funds to eligible borrowers using government-guaranteed loans. In January 2013, USDA created a microloan program within the existing direct farm operating loan program, using its regulatory prerogative.19 A proposed rule had been issued in May 2012. The new microloan program bears many similarities to the microloan program that was proposed in H.R. 3236. FSA had found that small farm operations—including nontraditional farms, specialty crop producers, and operators of community-supported agriculture—had unique needs and limited financing options. FSA found these farms could face unintended barriers when applying for USDA operating loans, often because of experience requirements and pledging collateral. The microloan program simplifies and expedites the application process, and adds flexibility for meeting loan eligibility and security requirements. The maximum microloan size is $35,000.20 17 CRS Report R42155, The Role of Local Food Systems in U.S. Farm Policy. This report discusses credit for farm producers. Credit for farmers markets and distribution systems are outside the scope of this report, but are mentioned in CRS Report R42155, The Role of Local Food Systems in U.S. Farm Policy. 19 Federal Register, Vol. 78, No. 12, pp. 3828-3836, Thursday, January 17, 2013, at http://fsa.usda.gov/Internet/ FSA_Federal_Notices/ml_01_17_2013.pdf. 20 USDA Farm Service Agency, “Microloan Fact Sheet,” January 2013, at http://fsa.usda.gov/Internet/FSA_File/ microloans_eng_jan2013.pdf 18 Congressional Research Service 10 Agricultural Credit: Institutions and Issues Farm Credit Administration Proposed Rule on Investments The Farm Credit System has proposed to expand its permissible activities through regulatory action. An expansion of investment opportunities would allow FCS to assist rural communities to expand infrastructure and housing facilities, as well as some rural business investment companies. Background on FCS Proposals for Expansion The Farm Credit System is authorized by statute to lend to farmers and ranchers. Loans may also be made for the processing and marketing activities of these borrowers, home loans in rural areas, certain farm-related businesses, and cooperatives. Loans to other borrowers are prohibited. In recent years, FCS has sought to expand its lending authority beyond traditional farm loans. In 2006, an FCS report titled Horizons19Horizons highlighted perceived needs for greater lending authority, including rural housing in towns with up to 50,000 population (the population limit is currently 2,500) and broader eligibility for agribusinesses. Commercial banks oppose any expansion of FCS lending authority, saying that credit in rural areas is not constrained given financial deregulation and integration, and that FCS’s GSE status provides an unfair advantage. 2021 They say that federal tax benefits for FCS are no longer necessary.2122 The policy decision of whether to expand FCS lending authority has become less about “farm credit” and more about the ideological role of a retail GSE lender competing with private lenders. Unlike the housing GSEs (Fannie Mae, Freddie Mac) that do not lend directly to homeowners, FCS is a retail lender that competes for farm loans against commercial banks. FCS asserts its statutory mandate to serve agriculture (and by extension, rural areas) through good and bad times. In Congress, committee jurisdiction has been questioned. During debate over the 2008 farm bill, the House Financial Services Committee and the Senate Banking Committee asserted jurisdiction for nonfarm lending and opposition to Horizons.2223 The Bush Administration opposed FCS expansion,2324 and a past chairman of the FCA, Michael Reyna, also voiced opposition.2425 In the end, the 2008 farm bill did not change FCS’s scope of lending authority. Mission-Related Investments On June 16, 2008, the FCA published a proposed rule to allow “mission related investments” (73 Rural Community Investments” (73 Federal Register 33931-33940).2526 These investments include (1) debt securities in projects that that benefit rural communities and (2) equity investments in venture capital funds. The proposed rule would define rural areas to include up to 50,000 residents. Targeted projects include community facilities, transportation, rural business investment companies, and venture capital funds. As 19 The Horizons report is available at http://www.fchorizons.com. 21 Bert Ely, “The Farm Credit System: Lending Anywhere but on the Farm,” at http://www.aba.com/nr/rdonlyres/ e1577452-246c-11d5-ab7c-00508b95258d/45256/horizons2006elyfinal.pdf. 21Solutions/ Documents/693d7e51f08c48b6a208ff59db9c0a41Horizons2006ELYFINAL.pdf. 22 The tax benefits for FCS include an exemption from federal, state, municipal, and local taxation on the profits earned by the real estate side of FCS. For investors who buy FCS bonds to finance the system, the interest earned is exempt from state, municipal, and local taxes. 2223 Letter on House-Senate Farm Bill Conference, January 15, 2008 http://www.house.gov/apps/list/press/ financialsvcs_dem/press011607.shtml, and letter to House Agriculture Committee, May 18, 2007 http://www.house.gov/apps/list/press/financialsvcs_dem/press052207.shtml. 23 18, 2007. 24 Statement of Administration Policy on H.R. 2419, July 25, 2007, p. 3, at http://www.whitehouse.gov/omb/legislative/ sap/110-1/hr2419sap-r.pdf. 24. 25 Congressional Record, July 26, 2007, p. H8728. 2526 FCA, proposed rule on Rural Community Investments, http://www.fca.gov/handbook.nsf/ ff16b393f6bb3aa0852563ce006665bb/ea4c5c5dfb4c60058525746b0044e5b1?OpenDocument. 20 Congressional Research Service 1511 Agricultural Credit: Institutions and Issues rule would define rural areas to include up to 50,000 residents. Targeted projects include community facilities, transportation, rural business investment companies, and venture capital funds. As discussed below, a final rule hasdiscussed below, a final rule as not yet been adopted, and FCA plans to replace the 2008 proposal with a new proposed rule by March 2013.27 and FCA’s projected date for a decision remains “undetermined.”26 FCA promoted the program “to allow greater flexibility” and “to better serve the changing needs of agriculture and rural areas.” The proposed rule states that “many rural areas are struggling to retain economic viability and vitality,” and that “essential facilities, infrastructure, and services ... often lag behind those in metropolitan areas ... obstacles to rural economic development and revitalization [that] are further compounded by funding challenges.” FCA designed the rule “to enable FCS to collaborate and partner in rural development ... as a financial intermediary promoting the flow of money into rural areas.” The scope of mission-related investments and the statutory restrictions governing to whom FCS may lend cause some to raise the following question: Do investments in bonds and venture capital effectively result in loans by another name to borrowers who otherwise are ineligible for FCS loans? Like banks, FCS institutions may use their assets to make loans or buy investments. Investments offer an alternative form of diversification to loans, and some types of investments can be appropriate for capital reserves. However, some question whether investments in the types of projects mentioned in the rule are safe and/or mission-related. Critics say that the rule’s definition of rural as 50,000 population is at odds with the FCS statutory limit of 2,500 population for rural home loans. Since 2004, an FCA pilot program (“Investments in Rural America”) has been allowing similar investments in what sometimes are called “Rural America Bonds.”2728 The proposed rule basically would make the pilot program— with revisions and the addition of the venture capital funds—a permanent part of FCS regulations and available to all FCS institutions. The FCA’s fall 2012 regulatory agenda anticipates that the review of the pilot program will be completed by March 2013 (see footnote 27). The 2008 proposed rule was open for public comment until August 15, 2008, and over 10,000 comments were submitted. 2829 Among the comment letters are two bipartisan letters from the House Financial Services Committee29Committee30 and the Senate Banking Committee30Committee31 opposing the rule. These letters note that the 2008 farm bill rejected legislation to expand FCS lending authorities, request the proposed rule be withdrawn, and ask that decisions about the scope of FCS activities be left to Congress. Also, Representatives Herger, Buyer, and Manzullo, and Senators Byrd, Lugar, and BingamanThree Members of the House and three Senators submitted letters from constituents who opposeopposed the rule. The chairmen of the House and Senate agriculture committees have not taken did not take a position publicly. USDA’s Rural Development Agency submitted a comment letter in support of the rule,31 which somewhat contradicts the Administration’s opposition to FCS expansion in the farm bill in 2007 (see footnote 23). 26 27 FCA, “Spring 2010Fall 2012 Regulatory Performance Plan,” February 19, 2010, at http://www.fca.gov/law/perf_plan.html. FCA, Informational Memorandum on “Investments in Rural America,” January 11, 2005. 2829 Comment letters are available at http://www.fca.gov/apps/regproj.nsf/e211b6dc2a9fbbba85256e5100541454/ 9dcc7754de2e51bb852572dd00526b3f?OpenDocument. 2930 Reps. Frank, Bachus, Maloney, and Biggert, House Financial Services Committee, letter to FCA on July 10, 2008, at http://www.aba.com/aba/documents/press/LettertoFCA7_10_08.pdf. 30fca.gov/apps/regproj.nsf/16b7ef8d45864c4685256e6100636419/b43f49f44d1c739b852574a90071f06b? OpenDocument.. 31 Senators Dodd and Shelby, Senate Banking Committee, letter to FCA on August 8, 2008, at http://www.fca.gov/ apps/regproj.nsf/9646a6b403d8272d85256e5100541453/c2d1d0197290ead2852574a2004a1021?OpenDocument. 31 James Alsop and Joseph Ben-Israel, USDA Rural Development, letter to FCA on August 14, 2008, at http://www.fca.gov/apps/regproj.nsf/9646a6b403d8272d85256e5100541453/8fed246b2b6da162852574a500617f65? OpenDocument. 27 Congressional Research Service 16 Agricultural Credit: Institutions and Issues 28 Congressional Research Service 12 Agricultural Credit: Institutions and Issues in support of the rule,32 which somewhat contradicted the Bush Administration’s opposition to FCS expansion in the farm bill in 2007 (see footnote 24). The disposition of the proposed rule now awaits action by the FCA. FCA’s 2010 regulatory agenda does not project a date for a final rule, but rather categorizes the rule as “undetermined” (see footnote 26). The FCA is authorized to fall 2012 regulatory agenda suggests that FCA plans to replace the 2008 proposal with a new proposed rule and end evaluation of the pilot program by March 2013 (see footnote 27). The FCA is authorized to implement rules that it believes are in accord with the statutes. Congress has no official role in the approval process for this proposed rule unless it exercises its legislative power, which could include disapproving the rule under the Congressional Review Act. Author Contact Information Jim Monke Specialist in Agricultural Policy jmonke@crs.loc.gov, 7-9664 32 James Alsop and Joseph Ben-Israel, USDA Rural Development, letter to FCA on August 14, 2008, at http://www.fca.gov/apps/regproj.nsf/9646a6b403d8272d85256e5100541453/8fed246b2b6da162852574a500617f65? OpenDocument. Congressional Research Service 13Congressional Research Service 17