ND Department of Agriculture Comments,
Speeches and Testimony

October 26, 1998

Director, Farm Loan Programs,
Loan Making Division
Farm Service Agency
U.S. Department of Agriculture
Room 5438-S
1400 Independence Avenue, S.W., STOP 0522
Washington, D.C. 20013-0523

RE: Implementation of Preferred Lender Program and Streamlining of Guaranteed Regulations. 63 Federal Register 51458, September 25, 1998

Dear Sir:

The North Dakota Department of Agriculture (NDDA) congratulates FSA for its continuing efforts to simplify and improve the guaranteed loan program. Generally, the proposed changes should improve the application process and servicing of guaranteed loans for lenders and farmers. Aside from certain exceptions, we support the proposed changes.

The NDDA strongly opposes the expansion of guaranteed loan eligibility to non-regulated lenders, such as equipment dealers and manufacturers, agricultural suppliers, etc.

Guaranteed Loan eligibility for such lenders would pose an inherent conflict of interest. Product sales are the primary function of these firms, and allowing them to place a guarantee on financed sales would encourage purchases by some that are financially unable to service the loan. The potential would also exist for abuse of the Interest Assistance Program as a sales incentive.

Guaranteed loans should only be made after assessing the overall creditworthiness of the applicant. Individual firms whose main functions are sales of equipment and/or supplies are not in the position to provide financial oversight of farm operations. Guaranteed loan expansion to non-regulated lenders should not happen.

The NDDA supports the implementation of a preferred lender program provided eligibility criteria is clarified, consistent, and is monitored to assure it does not result in increased loan failures. We understand that PLP lenders will be given maximum authority in all decisions short of FSA guaranteed loan approval and that the loan guarantee will be limited to 80 percent.

The NDDA supports the requirement that PLP lenders have a history of using the guaranteed program for new loans, instead of refinancing the lender’s existing debts. We believe that "new loans" needs further definition (if new money is combined with the refinance of an existing debt, is it a new loan?) and should remain as criteria for future certified PLP status. FSA might also consider that PLP status only be given to a CLP lender of new loans. This would mean a lender would have both PLP and CLP status.

We understand that PLP loans will receive automatic approval if FSA does not respond to the application within 14 calendar days. FSA should consider raising the loan approval authority to Ag Credit Manager’s and/or District Directors to allow FSA to properly review these loans within the 14-day period.

The NDDA believes that five years of financial and production documentation should remain the standard due to the additional inherent risk involved with loans requiring a guarantee. The current regulation allows a producer to eliminate one year out of the last five, then average the remaining four years. We believe that this formula produces a more realistic yield in considering possible consecutive natural disasters. At the very least, reducing the required years of records from five to three should be reserved for PLP lenders.

The NDDA does not believe FSA should pay for appraisals of the lender’s security in the event of a producer filing bankruptcy. This would further encourage the placement of guarantees on failing loans. Lenders should have incentives to work with borrowers on loan servicing, including debt write-down. The guaranteed loan program should not be used to simply pay for bad loans.

The NDDA supports the proposed requirement that, in the event of default, lenders repurchase the guaranteed portion of loans that have been sold into the secondary market. This will ensure that better loans are initially guaranteed, and will encourage lenders to service delinquent guaranteed loans. In some cases, however, lenders may not be able to repurchase loans because of lending limits, liquidity restrictions, or other reasons. FSA should further clarify what will constitute reasonable reasons for refusing to repurchase loans. If lenders are able to verify an acceptable reason, they should not be penalized under this proposal.

Sincerely,

Roger Johnson
Commissioner

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