FAQs About Borrower Rights
- Loan Applications
- Distressed Loans
- Distressed Loan Notices
- Distressed Loan Restructuring
- Credit Review Committees
- Collateral Evaluations
- Right of First Refusal
- Waivers/Loan Sales
- State Mediation
- Least-Cost Analysis
- Effective Interest Rate Disclosure
Note: These FAQs are specific to the provisions of the FCA Borrower Rights rules and do not address all situations that may be encountered. All citations are hyperlinks to the FCA Handbook on the FCA Web site.
Also, please note that the FAQs in black were originally created in July 2009 and then updated in March 2011. The FAQs in blue were created on March 1, 2013. They are 9A, 21A, 23A, 23B, 24B, 26B, 28A, 29A, 29B, 34B, 39A, 46A, 46B, 47A, 47B, and 63–66.
1. What are borrower rights?
Borrower rights are loan and collateral actions that farmers, ranchers, and producers or harvesters of aquatic products are entitled by law to receive when seeking extensions of credit from Farm Credit System (System) institutions. Extensions of credit include certain servicing actions on a loan as well as applying for a loan.
2. Which “borrowers” are afforded borrower rights?
Borrower rights apply to loan applications from, and loans made to, farmers, ranchers, and producers or harvesters of aquatic products. The loans may be for any agricultural or aquatic purpose or other credit needs of the borrower, including financing for basic processing and marketing directly related to the borrower's operations and those of other eligible farmers, ranchers, and producers or harvesters of aquatic products. Borrower rights do not extend to loans made under the System’s rural home lending authority.
3. Do loan guarantors have borrower rights?
Only in limited situations. Guarantors, or individuals pledging security for a loan, do not receive borrower rights for adverse credit decisions or distressed loan servicing because they are not the ones applying for the extension of credit. They may be eligible for the right of first refusal if they are the previous owner(s) of acquired agricultural real estate.
4. Do borrower rights apply if a loan is unsecured?
Yes. Borrower rights are not contingent upon a loan's having collateral or whether that collateral is real estate or chattel.
5. Does a qualified lender have to provide borrower rights when some or all of the collateral is “at risk”?
Normally, yes. Borrower rights do not prevent a qualified lender from taking necessary actions to protect collateral when there is a reasonable basis to believe the collateral will be destroyed, consumed, concealed, converted or permanently removed from the State in which the collateral is located. Qualified lenders may protect at-risk collateral regardless of any remaining time on an outstanding distressed loan servicing notice or the status of a restructuring application. The protection of at-risk collateral is an exception to borrower rights for extreme circumstances and should not be used to avoid offering restructuring rights. Borrower rights still have to be provided on the loan, unless the entire debt had to be foreclosed upon in order to protect the at-risk collateral.
6. Are loan assumption requests considered loan applications for borrower rights purposes?
Yes. Applying to assume a loan is considered a loan application. If a loan assumption request is rejected by a qualified lender, the applicant is entitled to receive notice of the adverse credit decision, which includes information on the right to request a review of the decision by the Credit Review Committee.
7. Is an agricultural loan designated for sale into the secondary market exempt from borrower rights?
Yes, but only for 180 days. The 180-day period begins on the date the agricultural loan is designated for sale into a secondary market (designations generally occur at the time the loans are made). Thereafter, borrower rights apply from the 181st day until the loan is actually sold into a secondary market. Once sold into a secondary market, the loan is again exempt from borrower rights.
8. Do borrower rights have to be offered on agricultural loans covered by a Long Term Standby Purchase Commitment (LTSPC)?
Yes, except for the first 180 days. Agricultural loans covered by LTSPCs are exempt from borrower rights for 180 days, beginning on the date the loans were designated for sale into a secondary market. Notwithstanding the terms of the LTSPC, these loans have borrower rights after the 180-day period has passed, continuing until the commitment to purchase the loans is “activated.” We consider loans covered by an LTSPC to be “sold” when the commitment to purchase them is executed and when title to or possession of the loans is exchanged.
9. What constitutes an applicant’s or borrower’s receipt of notice of an adverse credit decision?
Generally, receipt occurs when the applicant or borrower (or an agent of such) is in actual possession of the notice. To document receipt of adverse credit decisions related to loan restructurings, FCA rules require the qualified lender to send the notice in a manner requiring acknowledgment by the borrower. While there is no similar requirement in FCA rules for adverse loan application decisions, FCA encourages qualified lenders to follow the same practices as those for adverse restructuring decisions.
9A. How is a borrower’s receipt of a favorable credit restructuring decision documented?
FCA regulations require qualified lenders to send written notice of credit restructuring decisions, whether adverse or not, in a manner that requires the borrower to acknowledge receipt of the decision. We encourage qualified lenders to maintain a written policy describing what actions or documentation will satisfy this receipt requirement. For example, the policy may identify a signed and dated commitment returned by the borrower as constituting sufficient documentation that the borrower received the favorable credit decision notice.
10. How does a qualified lender demonstrate an applicant’s or borrower’s receipt of an adverse credit decision when the applicant or borrower refuses delivery?
Qualified lenders may establish the date an applicant or borrower receives an adverse credit decision by sending the initial adverse credit decision by certified mail to the last known address of the applicant or borrower. If this certified mailing is undeliverable after the U.S. Post Office has made two attempts, qualified lenders are encouraged to re-send adverse credit notices by regular mail. Qualified lenders following this two-step practice may then determine receipt or acceptance of the notice three to five business days after the regular mail notice is postmarked by the U.S. Post Office.
11. What are the notice requirements for adverse credit decisions on loan applications?
A qualified lender is required to notify an applicant as soon as possible if his or her loan application was denied or approved for less than the amount requested. The notice must state the specific reason(s) for the decision, inform the applicant(s) that he or she has the right to request a review of the decision before the Credit Review Committee, and briefly explain the process for seeking a review.
12. How specific must a qualified lender be in the notice to the applicant(s) when providing the reasons for the adverse credit decision?
Applicants have a right to know all the reasons leading to a denial of credit. Qualified lenders making an adverse credit decision must include in the notice the specific reason(s) for the decision. Including critical assumptions used in the decision-making process, as well as any other information, enables the applicant(s) to make an informed decision on whether to seek a review of the decision.
13. When a qualified lender issues an adverse credit decision on a loan application, does it have to give the applicant(s) copies of its collateral evaluations?
Yes. If a primary reason for the adverse credit decision is the value of collateral, than a copy of the relevant collateral evaluation(s) is included with the decision letter. For additional information on releasing collateral evaluations, see the “Collateral Evaluations” section of these FAQs.
14. Must a loan be delinquent to be considered distressed?
No. While most loans will be delinquent when they are identified as distressed, delinquency is not required. A distressed loan is a loan that the borrower does not have the financial capacity to pay according to its terms. To consider a loan distressed, the qualified lender must find one of the following: (1) adverse financial and repayment trends exist, (2) there is a monetary default (delinquency), or (3) one or both of the prior two conditions, along with inadequate collateralization, present a high probability of loss to the qualified lender. Examples of financial adversity may include a crop failure, the loss of a contract for the sale of the agricultural product, dramatic changes in the source or amount of funds available for repayment of the loan (e.g., unanticipated fluctuations in crop, dairy, or livestock prices), or rapid increases in input costs for the farming operation.
15. Is a 30-day delinquency sufficient to consider a loan distressed?
Maybe. The determination of whether a loan is distressed is typically done on a case-by-case basis. In some instances, a repeated 30-day delinquency, coupled with a declining financial condition, could be sufficient reason to identify a loan as distressed. However, a 30-day delinquency by itself may not necessarily indicate the loan is distressed. We encourage qualified lenders to avoid automatically treating any agricultural loan that is 30 days past due as distressed. Qualified lenders should analyze each loan and the circumstances surrounding the delinquency before considering it distressed.
15A. Would a loan that is current be considered distressed if one of its four borrowers files bankruptcy?
Maybe. The determination of distress is based on the loan, not the borrower, and while bankruptcies are usually an indication that a loan is distressed, in this situation it is unclear if the one borrower’s bankruptcy affects the loan. There are three other borrowers who might retain the financial capacity to repay the loan and so serve to keep the bankruptcy from making the loan distressed.
16. What is the purpose of the nonforeclosure notice?
The nonforeclosure notice informs the borrower(s) that his or her loan has been identified as distressed and that the borrower(s) has the right to request restructuring of the loan. If the borrower(s) does not apply for loan restructuring or if the loan is restructured and the borrower does not perform under the restructuring plan, the qualified lender must send another notice of restructuring opportunity (the 45-day notice) before proceeding to foreclosure.
17. What is the purpose of the 45-day notice?
The 45-day notice informs the borrower(s) that (1) the loan has been identified as distressed, (2) the borrower has the right to request restructuring of the loan, (3) the alternative to loan restructuring may be foreclosure, and (4) if the loan is restructured and the borrower does not perform under the restructuring plan, the lender may initiate foreclosure without further notice. The 45-day notice allows the qualified lender to proceed toward foreclosure without further restructuring notice to the borrower if the borrower does not apply for loan restructuring. However, the borrower must still be provided notice of the foreclosure action pursuant to State law requirements.
18. How does a qualified lender decide which notice to send?
It is more appropriate to use the nonforeclosure notice in situations where there is a reasonable expectation that the distress to the loan can be cured and that foreclosure can be avoided. The 45-day notice is best used when the situation causing the distress is sufficiently severe to create a high probability of foreclosure action.
19. Which distressed loan notice is sent to borrowers with unsecured loans?
FCA rules provide for either the nonforeclosure notice or the 45-day notice to be sent when a loan is identified as distressed. However, the type of notice to send to an unsecured distressed loan is problematic because there is no liquidation action (foreclosure) on uncollateralized loans—just the possibility that the qualified lender may pursue deficiency judgment action. In lieu of the 45-day notice we expect qualified lenders to send borrowers with unsecured distressed loans a modified version of the 45-day notice. The notice may be modified to replace the term "foreclosure" with another appropriate term, qualified such as a deficiency judgment, to inform the borrower of the qualified lender's intention to pursue legal proceedings on the unsecured debt.
19A. Is a distressed loan notice sent when a borrower files bankruptcy?
Generally, yes. A bankruptcy filing usually indicates a distressed loan because the filing is normally a borrower’s claim that he or she cannot meet all financial obligations as currently structured. Further, a distressed loan notice is a notice of rights and not a collection effort. As such, it should be provided to the borrower at time of bankruptcy filing to allow the borrower to make decisions on his or her bankruptcy filing (amending plans, etc.) with the foreknowledge of his or her restructure rights. For example, a borrower filing under chapter 7 may, in response to a distressed loan notice, decide to change the bankruptcy chapter filing to a plan of reorganization (chapter 11, 12, or 13) or exclude the qualified lender’s debt from the chapter 7 filing in order to pursue restructuring while remaining in bankruptcy for other reasons.
19B. May a qualified lender modify a distressed loan notice when it is being sent to a borrower(s) who has filed bankruptcy?
After conferring with its legal counsel, a qualified lender may modify a notice to the extent necessary to remain in compliance with the local bankruptcy court’s automatic stay. Because the Act and bankruptcy laws are read together in these situations, FCA examination staff will give proper consideration to the legal guidance a qualified lender obtained—if this legal guidance is properly documented in a loan file—when reviewing for compliance with distressed loan notice rules.
20. Which distressed loan notice is sent before a qualified lender may act to protect collateral it fears is at risk?
None. Regardless of whether the collateral is real estate or chattel, when there is a reasonable basis for believing collateral is at risk, a qualified lender does not have to send a distressed loan notice before taking legal action to protect the collateral for a loan. While the qualified lender does not have to provide a distressed loan notice before acting to protect the at-risk collateral, it must still send a distressed loan notice at the same time, or immediately after, it acts to protect the collateral. There is only one exception to this requirement: when the entire debt must be foreclosed upon to protect the collateral.
21. May distressed loan notices be used as collection notices or to “warn” chronically delinquent borrowers?
No. A distressed loan notice is not a collection notice; it is a notice of the opportunity to seek restructuring of a distressed loan. Distressed loan notices are specific notices provided to borrowers who are facing financial difficulties of the type contemplated under borrower rights. Sending a distressed loan notice obligates the qualified lender to follow borrower rights requirements until the distress to the loan is cured or the loan is foreclosed upon.
21A. What happens if a distressed loan notice is sent and the qualified lender later determines the loan(s) is not distressed? What happens if a borrower has filed an application in response to that notice?
Qualified lenders are required to determine if a loan is distressed before sending any distressed loan notice. If, however, after sending a distressed loan notice, the lender decides the loan is not distressed, the qualified lender may contact the borrower to clarify the situation and document for the files that the distress was resolved. Should a restructuring application be filed before the lender alters the distress determination, the lender must process the application. However, in those situations, borrowers have the option of withdrawing their distressed loan restructuring application or changing the application into a request for standard (nondistressed) servicing or refinancing consideration. In no case should the qualified lender ask the borrower to withdraw a request submitted in response to the distressed loan notice. In cases of erroneous distress determinations, any future distress is entitled to new notice and full distressed loan servicing rights, even if the 45-day notice was sent.
22. If the distress to a loan is resolved and then recurs, must another distressed loan notice be sent?
Probably. Generally, once the distress to a loan is cured, the borrower rights process is concluded, and, if the loan is later identified as again being distressed, the process begins anew. For example, if the distress to the loan was delinquency on loan payments and the borrower “cures” the delinquency by making all accrued payments, including any penalties, the qualified lender is prohibited from initiating foreclosure on the loan. If the loan again becomes distressed (even if from payment delinquency), the qualified lender must send a new distressed loan notice. Only in the case of a borrower who was initially sent the 45-day notice, whose loan distress was resolved through a restructuring, and who did not perform under the restructuring plan is no additional distressed loan notice required before the qualified lender pursues foreclosure action. However, the borrower must still be provided notice of the foreclosure action pursuant to State law requirements.
22A. If a borrower has multiple loans and not all are delinquent, may the association send the 45-day notice for all loans (assuming the loans are cross-collateralized/cross-defaulted)?
Maybe. The Act and FCA rules discuss distress to loans, not the entire debt or other interrelated loans, so notice would normally be limited to those loans actually identified as distressed. However, FCA recognizes that a determination of distress is often debt-wide and not loan specific. When a borrower's loans are cross-collateralized and have contractual ties in case of default (for example, the notes say that if one loan is in default, then all loans are in default), it may be more appropriate to send a notice for all interrelated loans because of the reliance on the same financial condition, performance, and source of funds for all loans. Qualified lenders must verify the interrelationship before proceeding and may not act under a blanket policy. Because of the interrelation of current and distressed loans in these situations, the qualified lender should consider restructuring the debt on its own, whether or not an application was submitted.
23. Is a qualified lender required to send a new distressed loan notice to the estate of a deceased borrower if the borrower died before making application for distressed loan restructuring?
No. The estate of the borrower is not technically eligible for distressed loan servicing, but may be eligible for the right of first refusal. We do, however, strongly encourage the qualified lender to voluntarily provide the executor of the estate with both notice and a 45-day waiting period before pursuing foreclosure. In the alternative, we expect the qualified lender to send the executor a letter explaining that (1) the borrower was sent a notice that the loan was distressed, (2) the borrower had the opportunity to submit a restructuring application, (3) no restructuring application was received from the borrower, and (4) the qualified lender is instituting foreclosure proceedings.
23A. May a qualified lender establish a deadline other than 45 days for responding to a distressed loan 45-day notice?
Yes, but qualified lenders may only give more time, not less, for submitting a restructuring application when using a 45-day notice.
23B. May a qualified lender establish a deadline for responding to a distressed loan nonforeclosure notice?
Yes, if the deadlines are in accordance with the qualified lender’s established borrower rights policies.
24. Is a restructuring application from the borrower required for the qualified lender to consider restructuring a distressed loan?
No. A qualified lender may propose, on its own, a restructuring plan to a borrower whose loan is distressed. Congress specifically authorized this action by the lender to ensure that all distressed loans are considered for restructuring, not just the loans of those borrowers who apply.
24A. Does a borrower have to submit an application for restructuring before meeting with the qualified lender to discuss either the distressed loan notice or the inputs into a restructure plan?
No. Both the Act and FCA regulations provide that a qualified lender must include in a distressed loan notice a statement that the borrower may meet with the lender to (1) review the status of the loan(s), the financial condition of the borrower, and/or the suitability of the loan(s) for restructuring; and (2) develop a plan of restructure if the loan is in nonaccrual status. There is no requirement that, prior to this meeting, the borrower submit an application to restructure the loan(s). In fact, FCA encourages this early interaction with borrowers to help them better understand their borrower rights and to develop the best possible restructure plan.
24B. After sending a distressed loan notice, how long do qualified lenders have to wait before approaching the borrower to discuss restructuring opportunities?
We encourage qualified lenders to wait a reasonable length of time after sending a distressed loan notice before approaching borrowers to discuss restructuring opportunities. We believe contacting borrowers in a timely manner to stimulate the restructuring process or begin negotiations to develop a restructure plan is a good business practice. Qualified lenders may also propose restructuring plans for individual borrowers, even when the borrowers have not submitted applications for restructuring.
25. If a qualified lender accepts a loan restructuring application after the due date stated in the distressed loan notice, is the lender obligated to process the application under borrower rights?
Yes. If a qualified lender accepts a restructuring application offered in response to a distressed loan notice after the date specified in the notice the qualified lender must process the application in accordance with borrower rights requirements. The Farm Credit Act specifically provides for a qualified lender to initiate restructuring of a distressed loan in the absence of an application from a borrower. In keeping with the purpose and intent of borrower rights, we liken the qualified lender's acceptance of a late application to the qualified lender voluntarily considering restructuring of the loan.
25A. How “complete” does a restructuring application, submitted in response to a distressed loan notice, have to be?
The application has to be complete enough to begin the process, but it does not have to include all information needed to make a restructuring decision. The Act and FCA rules define a restructure application as a written request from a borrower to restructure the loan(s) that is submitted on appropriate forms and supported by financial information and repayment projections. The information provided should be enough to “support a sound credit decision,” but lenders are expected to provide additional data, such as available loan terms and conditions. FCA expects the qualified lender to negotiate with (help) the borrower to develop the best plan possible, using sound credit standards and realistic projections. Congress added a provision in the Act providing for lenders and borrowers to meet to develop a restructure plan. Lenders may develop a restructuring plan without an application from the borrower.
26. May a qualified lender consider a borrower’s treatment of collateral when reviewing a restructuring application?
Yes. When considering an application for restructuring, a qualified lender may consider whether the borrower has the management skills necessary to protect collateral from diversion or other risks. This would generally occur in situations in which the qualified lender had to act to protect collateral believed to be at risk or in which there was a conversion of collateral proceeds.
26A. May a qualified lender consider a borrower’s bankruptcy plan of reorganization when offering distressed loan restructuring?
Yes. Borrower rights are generally compatible with filing for reorganization in bankruptcy, as both sets of laws are designed to resolve a borrower’s financial difficulties by offering various remedies to borrowers. Therefore, FCA allows qualified lenders to treat a borrower’s plan of reorganization (submitted in a bankruptcy proceeding) to serve as the application for restructuring if the bankruptcy paperwork contains all the information under section 4.14A(a)(1) of the Act.
26B. May a qualified lender make changes to a plan submitted with a borrower’s application for distressed loan restructuring?
Yes. The development of the restructuring plan on which a restructuring decision is made resembles the process used to evaluate loan requests. The borrower has asked for loan restructuring, submitting a preliminary plan of operations, which the lender must evaluate. Preferably, the lender will negotiate any projections or inputs to come up with the final plan. If the borrower and lender do not agree on financial projections, the qualified lender may, under our rules, use the operation’s production averages or other reasonable sources for financial projections and operational inputs.
27. Must an existing guarantor for a loan consent to a restructuring plan before it may be approved?
No. Guarantors do not have borrower rights for loan restructuring and are not the ones applying for the extension of credit. However, appropriate steps may be taken to transfer the guarantee to the restructured loan (for example, the lender may require the guarantor to sign the restructured loan note or guarantee agreement). At the time of loan making, qualified lenders may want to notify borrowers that any subsequent restructuring of a loan that currently has guarantors may require the guarantors to renew or re-pledge the guarantee.
27A. May an agreement to suspend payment on a distressed loan (also known as a “forbearance agreement”) be considered a restructure plan?
Probably not. Forbearance agreements are designed to bring the borrower current by either postponing or reducing loan payments. If a forbearance agreement does not increase the probability that the borrower’s operation will continue and it does not enable the borrower to maintain the lending relationship with the qualified lender, the forbearance agreement would not be a restructure plan as intended under borrower rights laws and regulations. Regardless, forbearance agreements should never require borrowers to surrender their rights.
27B. May a restructure plan include liquidation of collateral?
Yes, but only when liquidation of some assets is part of an overall plan of restructuring that is likely to cure the distress (such as by reducing debt), to help the borrower continue the operation, and to enable the borrower to maintain the lending relationship with the qualified lender. A plan calling for full or partial liquidation that is intended to stop the borrower’s operation or end the lending relationship is not a restructure plan: it is a plan of liquidation. There may be situations where, in response to a distressed loan notice, a borrower requests to liquidate the account. In those situations, qualified lenders are encouraged to make clear to borrowers that by responding in that manner, the borrower has declined to apply to restructure the loan and will not receive the right to a review by the Credit Review Committee on the liquidation plan.
28. What are the notice requirements for adverse credit decisions on applications for loan restructuring?
Qualified lenders making adverse credit decisions on requests for loan restructuring are required to notify the applicant(s) that a request was denied within 15 days of the conclusion of negotiations. The notice must state the specific reason(s) for the decision, inform the applicant(s) of his or her right to request a review of the decision before the Credit Review Committee, and briefly explain the process for seeking a review. A copy of the relevant collateral evaluation(s) is included with the decision letter if the reason for the adverse credit decision is the value of collateral.
28A. How does a decision letter address the situation where the borrower rejects a restructuring offer from the qualified lender?
If a restructuring offer is made and the borrower declines the offer, then a lender may issue an adverse decision letter. The reason for the adverse decision would be that the borrower declined the restructuring as offered. The decision letter should explain whether the restructuring offer is based on the plan submitted with the borrower’s application or whether any changes were made to the plan, and why those changes were made. For example, explaining that benchmarks were used because the borrower and lender were not able to agree on supportable or realistic financial projections. It is important for the adverse decision letter to be specific enough for the borrower to understand the reason for the decision, as that is the basis for any Credit Review Committee review.
29. When do the 15 days for issuing a notice of adverse credit decisions on restructuring applications start?
An adverse credit decision on a restructuring request must be provided within 15 days of the conclusion of negotiations. Negotiations in this context are meant to be a cooperative effort between the qualified lender and the borrower to develop the best restructuring plan possible. The 15-day period does not begin when the lender receives a signed application for restructuring and a proposed restructuring plan from the borrower. Rather, it begins when (1) the qualified lender has obtained information sufficient to make a safe and sound credit restructuring decision and (2) the qualified lender has attempted to address any deficiency in the information provided by the borrower.
29A. How are late payments treated when deciding whether a borrower has performed under a distressed loan restructuring?
Qualified lenders should rely on their established policies and procedures for late loan payments and not treat borrowers differently whose loans were restructured as part of distressed loan servicing. For example, if a qualified lender routinely gives a 10-day grace period past the established payment due date to borrowers, that same grace period would apply to a restructured distressed loan. Thus, if during the “performance” period of a restructured distressed loan, payments are late but within the grace period, those late payments would not be used to find the borrower has not “performed” under the restructuring.
29B. Are interest only payments included when applying the performance criteria for a restructured distressed loan?
If interest only payments are considered required payments under the qualified lender’s repayment policies, then they are also considered payment to determine “performance.”
30. Who serves on a Credit Review Committee?
The qualified lender forming a Credit Review Committee determines its size and composition, but at least one farmer-board member (a.k.a. stockholder-elected director) of the direct lender institution must serve on the committee. The loan officer/decision maker may not be on the committee.
31. Who forms a Credit Review Committee when the direct lender must obtain its supervising bank’s approval on a credit decision?
Generally, a Credit Review Committee is formed at the direct lender level. In the case of non-direct lender approval actions, the committee may be formed at either the direct lender level or the approval level (supervising bank). If the Credit Review Committee will be formed at the approval level (supervising bank), then the committee must, at a minimum, include a member who is a supervising bank director from the direct lender where the loan application originated. If there is no such director at the supervising bank, then one of the Credit Review Committee members must be a farmer board member from the direct lender. The rules that prohibit the loan officer/decision maker from serving on a Credit Review Committee still apply.
32. What decisions are reviewed by the Credit Review Committee?
On the request of an applicant or borrower, adverse credit decisions on loan applications and loan restructuring requests are subject to review by the qualified lender’s Credit Review Committee. Collateral evaluations used in adverse credit decisions are also subject to review by the committee. The Credit Review Committee has the final decision-making authority on the matter under review.
33. How long does an applicant or borrower have after he or she receives an adverse credit decision to request a review by the Credit Review Committee?
Applicants for agricultural loans have 30 days and applicants for loan restructuring have 7 days after receipt of an adverse credit decision to request a Credit Review Committee review of an adverse credit decision. To ensure that the appropriate amount of time is provided to seek a review of an adverse credit decision, FCA encourages qualified lenders to send adverse credit decisions by certified mail. If a qualified lender fails to achieve delivery by certified mail because the applicant or borrower refuses service, qualified lenders may rely on the guidance provided in FAQ 10.
33A. Does another 15-day advance notice of a Credit Review Committee meeting date have to be sent if the initial meeting date was postponed? What if the postponement was at the request of the applicant or borrower?
FCA regulations require qualified lenders to give a 15-day advance notice to an applicant or borrower of the date of a Credit Review Committee meeting being held to review the adverse decision affecting the applicant or borrower. This timeframe was added to FCA regulations to give applicants and borrowers time to arrange schedules to appear at the meeting. Thus, if the qualified lender needs to reschedule a previously planned Credit Review Committee meeting, the applicant or borrower must be provided a new 15-day advance notice. However, if the committee meeting is rescheduled at the request of the applicant or borrower, no additional 15-day notice is required—as long as the meeting date is within the timeframe requested by the applicant or borrower.
33B. What happens if the borrower, after asking for a review by the Credit Review Committee, proposes changes to the restructure plan that the qualified lender is willing to consider?
A qualified lender may agree to consider changes to the plan of restructuring that was the basis of the adverse decision. If this happens before the Credit Review Committee meeting, then the adverse decision is effectively withdrawn. After these changes are added to the plan and a new least-cost analysis is performed, if no restructuring is achieved then a new adverse decision letter notifying the borrower(s) of the right to a review by the Credit Review Committee would be issued. If the lender agrees to consider changes after a Credit Review Committee meeting, it is considered a new application and plan of restructuring, to which the committee’s decision on the original adverse credit decision does not apply.
33C. May the Credit Review Committee meet without the presence of the borrower or applicant?
Yes. However, if, when requesting a review by the Credit Review Committee, the borrower states the intention of attending the committee meeting, the qualified lender should try to schedule the meeting at a mutually convenient date to enable the borrower to attend. That does not mean the borrower can delay the meeting by claiming unavailability for an extended period of time. All parties must act in good faith to arrange the Credit Review Committee meeting.
34. May applicant(s) or borrower(s) appear before the Credit Review Committee?
Yes. Applicants and borrowers may make personal appearances before the committee and be accompanied by counsel or other representatives. Applicants and borrowers may also submit evidence to support information in the loan application or loan restructuring requests, and they may obtain an independent collateral evaluation in support of a challenge to a credit decision.
34A. What information may the Credit Review Committee consider in reviewing an adverse credit decision?
Applicants and borrowers may not bring “new” information to the committee meeting, but they may bring information in support of their previous submissions to the qualified lender. Information may also be presented to refute the qualified lender’s values used in a plan or collateral valuation. While applicants and borrowers should first raise issues on chattel values, crop prices, etc. during the planning stage and not at the Credit Review Committee meeting, if the lender refused to use information the applicant or borrower offered, that same information may then be provided, along with support for its veracity, to the committee.
34B. May Credit Review Committee meetings be held using videoconferencing?
Yes, if the applicant or borrower agrees. Applicants and borrowers are entitled to meet in person with the Credit Review Committee. However, if the applicant or borrower agrees, alternative meeting formats may be used. The qualified lender would need to address how documents supplied by and to the participants would be distributed before using alternative meeting formats. In addition, the Credit Review Committee meeting minutes would need to document how participants attended the meeting (e.g., videoconference, online meeting space, or in person).
35. Does a qualified lender have to give a borrower copies of collateral evaluations it prepared or acquired?
Yes. On the request of the borrower, a qualified lender must provide copies of all collateral evaluations of the borrower’s assets made or used by the qualified lender. The qualified lender may not limit the copies provided to just those collateral evaluations used in an adverse credit decision but must provide all collateral evaluations in the borrower’s file.
36. When releasing a collateral evaluation, may confidential information be withheld, such as comparables or environmental assessments?
Yes. Qualified lenders may withhold confidential information, but only to the extent that a collateral evaluation contains confidential third-party information. The qualified lender may protect such confidential third-party information by withholding any information that would disclose identifying characteristics of the third party or his or her property.
37. May applicant(s) or borrower(s) be charged for a copy of the collateral evaluation(s)?
At least one copy of the collateral evaluation(s) must be provided free of charge. The qualified lender may assess reasonable copying charges for any additional copies requested or if the request is made in a situation where the application for credit was withdrawn before the qualified lender provided notice of its decision.
38. What is the right of first refusal?
The right of first refusal is the right to be offered the first opportunity to lease or purchase agricultural real estate that a System institution acquired through foreclosure or voluntary conveyance. The institution does not have to offer financing with this right. The right of first refusal does not apply to non-real estate collateral.
39. Who has the right of first refusal?
The previous record owner(s) of the acquired agricultural real estate has the right of first refusal. The right only exists when the System institution determines the property was acquired because the borrower did not have the financial resources to avoid a foreclosure action. While the borrower’s ability to avoid foreclosure determines if the right of first refusal applies, the right of first refusal belongs to the previous owner(s).
39A. Is the right of first refusal assignable?
No. The right of first refusal is a statutory right that is personal to the previous owner and not assignable or otherwise transferrable.
40. What is the difference between a borrower and previous owner when it comes to the right of first refusal?
A borrower is the one who was, or is currently, in a lending relationship with the System institution. The previous owner is the individual(s) or entity that was the record title holder to the property before the foreclosure or voluntary conveyance. In many instances, the borrower and the previous owner will be the same individual(s) or entity, but in situations where the collateral for the loan was offered by a guarantor or other party, that person has the right to lease or purchase his or her property back in the event the borrower defaults on the loan.
40A. If a System institution acquires agricultural real estate through a foreclosure sale, may the institution send a notice of the right of first refusal before it receives official title to the property, such as when there is a delay in title transfer because of State redemption rights?
No. While FCA encourages giving the former owner notice as soon as possible, the Act requires a System institution to act on a former owner’s response to the right of first refusal within 15 days. If the former owner agrees to buy the property at the appraised value, then the System institution may not be able to comply with the statutory 15-day deadline if it does not yet have full and complete legal title to the property.
40B. May a System institution offer acquired property to the former owner at below-market value?
Yes. While a System institution must offer the former owner the opportunity to buy (or lease) acquired property at the fair market value and the previous owner has the right to offer less than that amount, nothing in the law or regulations prevents a System institution from indicating in the initial notice a willingness to accept below-market offers.
41. Do previous owners of property acquired through a deficiency judgment have the right of first refusal?
No. Because of the numerous distinct laws governing the right to obtain deficiency judgments, FCA does not consider deficiency judgments as essential parts of foreclosures. Rather, they are related actions that can sometimes be combined with foreclosures. Therefore, property acquired as a result of collection under a deficiency judgment would not be subject to the right of first refusal.
42. Does a System institution have to offer the right of first refusal when the property was acquired through a bankruptcy action?
Yes. Property is generally acquired in a bankruptcy proceeding by the lender obtaining a relief from stay to foreclose on the real estate. Thus, the eventual acquisition of the property by the System institution is the result of a foreclosure action and the right of first refusal applies.
42A. Does the right of first refusal apply if agricultural real estate is acquired by a System institution through the foreclosure sale of another lien holder?
Yes. The right of first refusal applies when a System institution acquires agricultural real estate through a foreclosure sale initiated by another lien holder.
42B. Does a System institution have to offer the right of first refusal when the property was acquired through a State-chartered business entity, such as a limited liability company or partnership owned or controlled by the System institution?
Yes. System institutions may, for very limited purposes, form or invest in limited liability companies and other State-chartered business entities to make credit bids at foreclosure sales (and other court-approved auctions) and to hold and manage acquired property. For the purposes of borrower rights, these State-chartered business entities “stand in the shoes” of the System institution. Thus, the right of first refusal must be offered to the former owner(s) of record for those properties acquired by the State-chartered entity to the same extent as if the System institution had directly acquired the property.
43. To whom does the institution send the notice of right of first refusal when the borrower, who was also the previous owner, is in bankruptcy?
System institutions may follow the instructions set forth in § 617.7410(c) and (d) of FCA rules when sending distressed loan notices to borrowers in bankruptcy, with the exception that the notice does not go to all obligors, only to the previous owner(s).
43A. To whom does the System institution provide the right of first refusal if there is more than one record owner on property taken into inventory?
System institutions send the right-of-first-refusal notice to all previous owners of record (who may not be borrowers on a loan). If there are multiple former owners of a single parcel, the right is offered to all. If there are multiple parcels with the same former owners on all parcels, the right-of-first-refusal letter should indicate that the former owners may buy any or all of the parcels—it is not an “all-or-nothing” deal. If there are multiple parcels with different former owners, then the right is only offered to the former owner(s) on those parcels to which the individual(s) was the prior record owner—not on all of the parcels securing the debt.
A System institution must give the previous owner(s) 30 calendar days to respond to the right-of-first-refusal notice to purchase the acquired property (15 days for leasing opportunities). If one of the prior owners of a parcel responds “first,” the institution will still have to wait the full 30 days (15 days for leasing opportunities) before accepting/rejecting any offer. Because of the 15-day response time, in multiple-owner situations the System institution may respond to the "first" offer with an indication of whether the offer is acceptable or not but also advising the offeror that the other prior owners still have XX days to make an offer on the property. If no other previous owner makes an offer within the remaining time, the System institution may proceed with processing the offer received.
44. Does a notice of right of first refusal have to be sent if a System institution decides to sell acquired property through a public auction?
No, but institutions have to give the previous owner(s) notice of the public auction before, or at the same time as, public notice of the auction is made. The notice has to contain all relevant information, such as the time, place, and opening bid for the auction, to enable the previous owner(s) to decide if he or she wants to participate in the auction. The goal of the right of first refusal is achieved if the previous owner(s) puts in a bid for the property. The institution must accept the previous owner’s bid when it is the highest bid or it ties with the highest bid.
45. If the previous owner declines the right of first refusal before the statutorily provided timelimit has expired, may the institution proceed right away with selling the property to others?
No. The Farm Credit Act gives the previous owner 30 calendar days to respond to the opportunity to purchase the acquired property (15 days for leasing opportunities), and the previous owner is entitled to the full 30 days. Even if the previous owner responds before that time has expired, he or she has the remaining time to change his or her mind. Likewise, the failure of the previous owner to respond still requires the institution to wait until the 30-day period has passed before proceeding to sell the property to others (15 days for leasing opportunities). Furthermore, a System institution may not ask the previous owner to respond sooner than the number of days established by statute.
45A. Does the right of first refusal apply even if the former owner cannot afford to buy back the property?
Yes. The right of first refusal is an absolute right of the former owner that must be provided by the System institution. If the former owner offers to buy or lease the property but then cannot obtain funds to complete the transaction, the System institution may, after giving the former owner a reasonable opportunity to obtain funds, offer the property to third parties.
46. Does the System institution have to accept an offer by the previous owner(s) to buy the acquired property for less than appraised market value?
No. A System institution may either accept or reject an offer by the previous owner(s) for less than the appraised market value of the property.
46A. What sale or lease terms and conditions may a System institution use when sending the initial right of first refusal notice?
The sale or lease terms and conditions used in the initial right of first refusal notice may not be overly burdensome, diminish a previous owner’s first refusal rights, nor be substantially different from those that would be applied to all potential purchasers.
46B. When the previous owner offers to buy or lease the property at the appraised fair market value or rental value, does the sale or lease transaction have to be completed within 15 days?
Although the Farm Credit Act requires the System institution to accept the offer within 15 days, the actual closing date of the sale or effective date of a lease does not have to occur within that same 15 days. The parties may agree, as part of the terms, to a date when possession of the property (either the closing date or date the lease begins) would occur, even if it would be later than 15 days from the previous owner’s offer.
47. When does a System institution have to re-offer acquired property to the previous owner(s)?
System institutions must give a previous owner a second opportunity to re-acquire the property in two situations: (1) when the institution is considering a third-party offer for below the appraised value and the previous owner made a below-market offer on the property in response to the original notice, or (2) when the institution is considering offering the acquired property to a third party on different terms or conditions than those offered to the previous owner. While a System institution does not have to accept a below-market appraisal offer from a previous owner(s), the institution may not later sell the property to a third party for below-market value or under different terms and conditions without first giving the previous owner(s) another opportunity to acquire the property.
47A. May institutions list property for sale or lease before the right of first refusal expires?
Yes. Listing the property for general sale or lease after the right of first refusal notice is sent assures the former owner that the price and the terms and conditions of sale within the notice are those offered to all potential buyers (or lessees). Also, the listing may facilitate speedy liquidation of the acquired property.
47B. May institutions agree to sell or lease acquired property to a third party before the initial right of first refusal has expired?
No. After receipt of the initial notice, the former owner has 15 days to offer to lease or 30 days to offer to buy the acquired property. Institutions may not negotiate or enter any sale or lease agreement with a third party before the former owner has had the opportunity to exercise his or her initial right of first refusal.
48. If the previous owner did not respond to the initial offer to re-acquire the property, does the System institution have to re-offer the property to the previous owner before selling it to a third party for below the appraised value?
No. If the previous owner expressed no interest in purchasing or leasing the property, the institution is not required by the Farm Credit Act to send a second notice to the previous owner (but may be required to do so under State law). While System institutions are not required to do so, they may, in keeping with the spirit of the law, give a previous owner who did not respond to the initial notice the opportunity to purchase or lease the property at the same value that a third party has offered.
48A. May a System institution reclassify property as nonagricultural when taken into inventory?
Probably not. Property is generally classified as either agricultural or nonagricultural by a System institution at the time of loan making, and System institutions may not change that classification at loan liquidation without a compelling reason. Because the initial classification during loan making affected the type of financing provided, System institutions may not alter this classification for loan liquidation purposes—particularly when a change in property classification during loan liquidation may cause a former owner to be denied the opportunity to exercise the right of first refusal. However, some situations may arise when property should be reclassified—for example, when modifications in land use or zoning occurred during the life of the loan. System institutions should clearly document any such reclassification change, demonstrating that the changes to the land occurred during the life of the loan and did not exist at the time of loan making.
49. May a qualified lender waive borrower rights to facilitate a sale of the loan?
No. Borrower rights are part of the agricultural credit extended by the qualified lender and belong to the borrower, not the lender. It is therefore the borrower’s choice whether to relinquish these rights to facilitate a loan sale.
50. May a qualified lender ask a borrower to waive future borrower rights as part of a current restructuring?
No. Qualified lenders may not ask for, or accept, a waiver of future borrower rights as part of a restructuring decision.
51. Are there any situations where borrower rights may be waived?
Yes. A waiver of borrower rights is permitted for three types of transactions: (1) a loan guaranteed by the Small Business Administration, (2) certain loan sales, and (3) certain loan syndications. In all other instances waivers are not permitted. For more information on allowable waivers of borrower rights, see FCA rules at § 617.7010(b) and (c).
52. Must qualified lenders participate in agricultural State mediation programs?
Yes. A qualified lender must participate if a borrower requests it and a State mediation program, certified under section 501 of the Agricultural Credit Act of 1987, exists in the State where the borrower lives or where the farm operation is located. Qualified lenders must cooperate in any mediation by presenting and exploring all debt restructuring proposals discussed during the mediation and providing information to facilitate the mediation process. If allowed in the State, qualified lenders may, on their own, initiate mediations—but may not require the borrower to participate. Qualified lenders may also never ask for, nor condition loan servicing on, the borrower’s waiving mediation rights.
53. At what point in distressed loan servicing may a borrower request agricultural State mediation?
Borrowers have the right to seek mediation at any time during a distressed loan servicing, including after a decision has been made by the qualified lender or a review by the Credit Review Committee has been requested. However, mediation may not be requested after a Credit Review Committee has met on the matter or issued its decision: Credit Review Committee decisions are final decisions on matters under its review.
54. When an agricultural State mediation is requested, what is the effect on loan servicing timeframes, including deadlines for review by Credit Review Committees?
If the borrower requested mediation before a decision letter was issued, the qualified lender’s time to issue a decision would start at the conclusion of the mediation. This is because the mediation process would be included as part of the plan negotiations. For example, if the mediation did not result in a plan of restructure that all parties agreed to, the lender would have the full 15 days after the mediation concluded to issue an adverse decision letter. If the borrower requests mediation after receiving the adverse decision letter, timeframes are frozen from the point a borrower requests mediation to the conclusion of the mediation. The timelines restart after the borrower receives notice of the results of the mediation. This notice would include any remaining time the borrower has to request a review by the Credit Review Committee. However, the 15-day notice to the borrower before a Credit Review Committee meeting remains intact. Similarly, independent collateral evaluations may proceed during the mediation to the extent that the contract appraiser may work on the appraisal—not to the extent that the lender or the Credit Review Committee acts on the independent evaluation.
55. What is the purpose of the least-cost analysis?
The least-cost analysis determines the point where the lender may encounter financial harm by providing restructuring assistance to a borrower. If it costs the lender the same or less to offer restructuring than it costs to foreclose on the property, then the lender is required by law to restructure the loan(s).
56. What are the costs of restructuring and how are they determined?
Similar to the measureable standards lenders developed as part of their lending and loan underwriting polices, FCA regulations require qualified lenders to have measurable criteria in place to capture restructure costs. At a minimum, these criteria should allow the lender to assign a cost to those restructuring considerations listed in the regulation, including (1) the present value of foregone interest and principal made part of a restructure plan; (2) the administrative expense of processing a distressed loan restructure plan, including any additional time needed to research or acquire the necessary financial information if the borrower does not furnish current financial statements; and (3) any extraordinary efforts to service the restructured debt, such as additional staff hours or lost/delayed interest income resulting when the restructure plan does not show a likelihood of scheduled debt repayment. (Extraordinary efforts would generally be those considered to be beyond what is normally extended to service any debt that has a plan showing a likelihood of scheduled debt repayment.) A qualified lender should include only those costs that it reasonably anticipates it will incur to restructure a specific distressed loan.
57. Where are nonmonetary criteria, such as management ability, captured in the least-cost analysis?
Qualified lenders will have to develop measureable criteria for nonmonetary considerations and assign costs to them. These may then logically be incorporated into the least-cost analysis as subsets of the restructure criteria addressing the likelihood of debt repayment. For example, it is reasonable to recognize that a borrower’s managerial ability or ability to work out of existing financial difficulties is directly related to whether the debt is likely to be paid as scheduled. It is also reasonable to include the assessment of whether or not the restructure plan calls for applying all income—over and above necessary and reasonable living and operating expenses—to the payment of primary obligations into the criteria on debt repayment.
58. May a qualified lender include potential recovery from a guarantor in the least-cost analysis?
Yes. The potential recovery from the guarantor(s) may be a restructure cost criterion because the use of guarantors typically provides financial strength to the borrower’s restructuring application. Similarly, the potential recovery from guarantors may be included in the foreclosure cost criteria as a mitigation of liquidation values and/or as part of the overall liquidation costs (that is, the cost of collecting from guarantor(s)).
59. Are all cost criteria used in every least-cost analysis?
No. Qualified lenders would use only those cost criteria that are appropriate to a particular plan of restructure when preparing the least-cost analysis. For example, those plans of restructure that do not include forgoing principal or interest would not include that particular cost criterion in the least-cost analysis. Neither would plans that demonstrate a likelihood that debts will be repaid as scheduled include repayment (viability) as a “cost of restructure.”
60. May a qualified lender foreclose on a distressed loan without a least-cost analysis?
Maybe. When a plan of restructure has been prepared, the qualified lender must prepare a least-cost analysis. The qualified lender will then use the least-cost analysis to identify whether or not the cost associated with restructuring the distressed loan(s) according to the plan is the same as or less than the cost of foreclosing on those loans. The law requires the lender to, in all cases, restructure loans when it costs the same as or less than foreclosing on the loans. Further, if there is more than one plan of restructure that will address the source of distress to the loan and if those alternative plans also cost less than the cost of foreclosure, the lender must use the plan that results in the lowest cost to the lender. However, if no plan of restructure was prepared—as in the case of a borrower who does not respond to the 45-day notice and the qualified lender that does not prepare a plan on its own—then the least-cost analysis does not have to be completed prior to foreclosing on the loan(s).
61. Does the least-cost analysis have to be completed if the qualified lender knows it will restructure the distressed loan(s)?
Every plan of restructure prepared as part of distressed loan servicing must have a least-cost analysis, including those situations where the borrower and lender develop a strong restructure plan. While qualified lenders may believe this analysis is not necessary, FCA is concerned that failure to conduct the analysis will not result in the best resolution to the distress. For example, qualified lenders may decide to restructure distressed loans that show repayment ability but not consider whether that repayment is realistic or if repayment of the loan installments alone will cure the distress. FCA believes that the least-cost analysis facilitates the process of determining if a restructuring will cure the source of the distress because it involves considering not just the cash flow of the borrower but payment of other debts and living expenses, the managerial ability of the borrower to resolve existing financial difficulties, and, most importantly for those loans in which distress is not strictly monetary, the likelihood that restructuring will help prevent the loan from being placed into non-interest-earning status in the future.
62. If the cost of foreclosure calculation results in a net gain to the lender, how should associations use this gain when comparing the cost of restructuring and the cost of foreclosing?
If the cost of foreclosure calculation results in a net gain to the lender, then the “cost” of foreclosure is zero because full recovery of all foreclosure costs will be obtained (this situation will usually arise where the value of collateral exceeds the debt). If the cost of restructuring is also zero, the lender will have to restructure the loan because the Act requires the lender to restructure when the cost to do so is less than or equal to the cost of foreclosure.
Yes. All loans not covered by the Truth in Lending Act (TILA) receive effective interest rate disclosures, and farm-related business loans are not covered by TILA.
64. Are new interest rate disclosures required when renewing a loan?
New disclosures are required if, in the process of renewing a loan, the rates change, a new note is signed, more stock is bought, or new fees are paid.
65. What are the effective interest rate notice requirements for automatic or “rollover” renewals of credit?
Qualified lenders would make a new effective interest rate disclosure if the credit renewal is a new loan. If the type of credit is a line of credit and not a new loan each year, then there is normally no additional effective interest rate disclosure (absent additional stock purchases or origination fees), but there are disclosures required for changes in interest rates on all loans, whether new or existing.
66. Do institutions have to disclose if any prepayment penalties apply to a loan?
Yes. Both Regulation Z, implementing the Truth in Lending Act (TILA), and the Farm Credit Act require disclosure of loan terms. For consumer transactions, including residential mortgage loans, TILA requires specific disclosure of whether or not a prepayment penalty applies. For agricultural loans, System institutions are required to disclose in writing the loan terms and conditions, which include any prepayment penalty associated with the loan. The disclosures must be meaningful, providing enough information for the applicant or borrower to understand the loan terms and conditions to which he or she is agreeing.