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Informational Memorandum
Subject:Working with Distressed Borrowers
Date of Memorandum:09/14/1998
Expiration Date:
Signed By:Smith, Roland
FCA Contact Person:Smith, Roland
Contact Phone:703-883-4160
List of Attachments:None


September 14, 1998

To: The Chairman of the Board
The Chief Executive Officer
All Farm Credit Institutions

From: Roland E. Smith, Chief Examiner
Office of Examination

Subject: Working with Distressed Borrowers

Recent reports provided by Farm Credit System (FCS) institutions disclosed that the overall quality of loan assets was satisfactory and that the financial condition of System institutions was fundamentally sound. However, these reports do not reflect the risk emerging from financial and economic crisis in the international arena or domestic problems that affect agriculture. Declining exports, currency devaluation, unfavorable currency exchange rates, oversupply of certain commodities, and adverse weather have materially affected prices the producer and marketer receives. Because of the time it takes for risk to surface in the institutions’ financial conditions, operating losses incurred by borrowers during the 1998 crop year will probably not be reflected until 1999.

In an Informational Memorandum (memorandum) dated August 10, 1998, the Chairman and Chief Executive Officer of the Farm Credit Administration (FCA), reiterated the FCA Board’s June 13, 1996 Policy Statement on Disaster Relief Efforts by Farm Credit Institutions. That memorandum also reminded FCS institutions that Section 4.14A of the Farm Credit Act of 1971, as amended, requires qualified lenders to consider restructuring a loan prior to foreclosure. In this regard, FCS institutions should accelerate contacts with those borrowers who they believe may become stressed due to the unfavorable economic environment. Timely contact, before the borrower’s loan becomes delinquent, can provide early resolution of problems that can be mutually beneficial to the borrower and the lender. In many instances, the opportunity to seek a guarantee from government agencies can substantially benefit the borrower and mitigate risk in the institution’s portfolio that would improve the options available to both the borrower and lender. When conducted in a reasonable and prudent manner, the examiners will consider the efforts of the FCS to work with distressed borrowers, consistent with safe and sound business practices.

The current environment is difficult, and there is no doubt that some borrowers will not be able to satisfy their obligations in the short term. Since many farmers and ranchers are viable and have the capacity to take on more debt, loan volume could increase from both refinanced loans and carryover debt, as well as new borrowers. The potential increases in loan volume and risk that might emerge from this environment could strain the adequacy of capital and weaken the risk coverage provided by the allowance for loan losses in some institutions. In this regard, I strongly encourage you to review business and capital plans that were made when the operating environment was quite different and perhaps more favorable. There remains sufficient time to reevaluate capital and allowance needs that have changed due to increased portfolio risk. It is also an opportune time to reconsider capital and allowance needs that might emerge in future periods because of the changes that may occur over your planning horizon. A decision to preserve or build additional capital today is a sound business practice that may increase your options when working with distressed borrowers in the future.

If you have any questions regarding this document, please contact me at (703) 883-4160, or on the Internet at e-mail address