COVID-19 and USDA Farm Loan Flexibilities

COVID-19 and USDA Farm Loan Flexibilities

INSIGHTi

COVID-19 and USDA Farm Loan Flexibilities
June 3, 2020
On May 21, 2020, the U.S. Department of Agriculture (USDA) temporarily expanded the Disaster Set-
Aside (DSA) provision to allow flexibility for farm loan repayment due to the economic effects of the
Coronavirus Disease 2019 (COVID-19) pandemic. The set-aside provision allows a borrower to move a
loan payment owed to USDA’s Farm Service Agency (FSA) to the end of the loan or, in the case of an
annual operating loan, to extend the payment by a year. Interest continues to accrue on the deferred
principal; neither the interest nor the principal is forgiven. The set-aside (deferment) is meant to provide
financial relief and cash flow flexibility during a crisis.
Earlier during the pandemic, on March 26, 2020, USDA announced certain flexibilities in its loan-making
and servicing procedures. These included relaxing deadlines, accommodating social distancing, and
temporarily suspending loan accelerations and new foreclosures.
Disaster Set-Aside Provision
Disaster set-aside has been available to FSA farm loan borrowers since 1994 (7 C.F.R. §766.51-61). The
underlying authority (Section 331A of the Consolidated Farm and Rural Development Act, 7 U.S.C.
§1981a) gives the Secretary of Agriculture discretion to defer principal and interest to forgo foreclosure if
a borrower is temporarily unable to make payment due to circumstances beyond the borrower’s control.
USDA implemented the regulations to apply to natural disasters but has made temporary exceptions for
losses due to low prices in 1998 and 1999 (64 Federal Register 392, January 5, 1999; and 65 Federal
Register 31248, May 17, 2000) and now for the COVID-19 pandemic in 2020.
The DSA affects loans made and serviced by FSA, referred to as direct loans. The DSA covers direct farm
ownership (real estate) loans and direct farm operating loans but may also apply to conservation and
emergency loans that are also direct. The DSA does not apply to guaranteed loans that are made and
serviced by an originating lender such as the Farm Credit System (FCS) or commercial banks. (See CRS
Report RS21977, Agricultural Credit: Institutions and Issues.) DSA is intended to allow borrowers to
recover from losses without incurring additional debt or liquidating assets. The cost to the government is
less than forgiving debt. Normally, one set-aside installment is allowed for each loan, but the temporarily
expanded provision allows for a second set-aside if one already exists.
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Farm Loan Servicing
Loan servicing refers to the process followed under law when a borrower is unable to make payments on
a loan, the loan becomes delinquent, or the lender initiates foreclosure. Federal law prescribes a series of
borrower rights for USDA farm loans, including notification, restructuring, write-down, and homestead
protection.
For direct loans, USDA stated in a press release on March 26, 2020, that it would “temporarily suspend
loan accelerations, non-judicial foreclosures, and referring [new] foreclosures to the Department of
Justice” during the public health emergency.
For guaranteed loans, USDA is being more flexible working with originating lenders (e.g., commercial
banks or the FCS), when the lenders request, to consider future lines of credit, temporary payment
deferrals, or forbearances on foreclosures.
Availability of FSA Farm Loans
As of May 28, 2020—two-thirds through FY2020—FSA reported that about half of its farm loan funding
authority remained unused. This incorporates both FY2020 appropriations and carryover balances. For
operating loans, about 60% or more of direct and guaranteed loan authorities remain. For farm ownership
loans, about one-quarter of the direct and guaranteed loan authorities remain, and less than 5% remains
for borrowers who are not beginning farmers or members of socially disadvantaged groups. For
emergency loans, nearly all available loan authority remains, since program use depends on natural
disasters that have been few through the fall and winter and because a public health emergency is not
among the criteria for making them available (Table 1).
Table 1. USDA Farm Loans: FY2020 Authority and Availability Remaining
(dollars in millions)
FY2020 Loan
Availability as of
Authority
May 28, 2020
Percent Remaining

Operating loans
Direct loans
2,463
1,462
59%
Guaranteed loans
3,764
2,847
76%

Farm ownership loans
Direct loans
1,875
523
28%
Guaranteed loans
2,750
802
29%
Emergency loans (direct)
122
121
99%
Source: FSA, farm loan programs funding (accessed June 1, 2020).
Note: FY2020 loan authority includes annual appropriations and carryover balances.
For many farms at this point in the crop year, annual operating lines of credit were secured before the
public health emergency was declared. The funding remaining, especially for operating loans, indicates
that sufficient authority has likely been available for this crop year. The COVID-19 pandemic is
undercutting farm income rather than immediately raising loan demand for many farms. Nonetheless,
lower farm incomes may lead to future loan repayment difficulties, as indicated by the DSA and loan
servicing flexibilities discussed above. Payments on many farm loans may not be due until later in the
calendar year after harvest.

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FSA Farm Loan Portfolio
On April 30, 2020, FSA released updated data about its outstanding loan portfolio and loan delinquencies
(Table 2). FSA holds $12.8 billion of direct loans (including farm operating and farm ownership), which
is about 3% of the $415 billion sector-wide farm debt total in 2019. The FSA delinquency rate on
repayment remains steady at about 5%, especially on a seasonal basis compared to the previous year. This
is generally a high rate relative to bank loans but is not abnormal for FSA borrowers, who are by
definition unable to obtain credit elsewhere.
FSA guarantees $16.6 billion of loans made by other lenders, which is about 5% of an estimated $340
billion of farm loans made by commercial banks and the FCS. The delinquency rate for these loans is
steady at 1.6%, consistent with the underlying loan performance at those lenders. Growth in the FSA
portfolio since last year is faster than the growth in the sector-wide debt balance, indicating that more
farms are experiencing financial stress as the farm economy has slowed even before the pandemic.
Table 2. USDA Farm Loan Portfolio and Delinquency Rates
(dollars in millions)

Direct Loans
Guaranteed Loans

Portfolio
% Delinquent
Portfolio
% Delinquent
Sep. 30, 2018
11,437
4.7%
15,741
1.4%
Apr. 30, 2019
11,485
5.5%
15,761
1.6%
Sep. 30, 2019
12,250
4.5%
16,435
1.6%
Apr. 30, 2020
12,752
5.0%
16,583
1.6%
Source: FSA, farm loan programs loan servicing data as of 9/30/2019, and farm loan programs direct and guaranteed data
as of 4/30/2020.
Note: FSA direct loans are about 3% of the $415 bil ion sector-wide farm debt total in 2019. FSA guarantees are about 5%
of an estimated $340 bil ion of the farm loans that are issued by the Farm Credit System and commercial banks.

Author Information

Jim Monke

Specialist in Agricultural Policy

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