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FCA Examination Bulletin
NumberFCA 2006-2
SubjectLending Programs for Farmers' Other Credit Needs
Date Published10/2006

PURPOSE


This bulletin provides Farm Credit Administration (FCA) examiners guidance for evaluating programs that Farm Credit System (System) institutions use in meeting the other (i.e., nonagricultural) credit needs of farmers, ranchers, and producers or harvesters of aquatic products (farmers). This bulletin clarifies "other credit needs financing" available to eligible borrowers as authorized by sections 1.11(a)(1) and 2.4(a)(1) of the Farm Credit Act of 1971, as amended, and defined by FCA regulation 613.3000.

INTRODUCTION

FCA Regulation 613.3005 envisions financing of farmers’ agricultural needs and provides general parameters for financing their other credit needs. The regulation provides System institutions significant latitude to implement these parameters within the lending objectives established in the rule. In order to comply with the general parameters in 613.3005, examiners should expect institution boards of directors to establish clear policy direction that outlines the institution’s program for implementing the regulation and meeting the credit needs of farmers, including their other credit needs. The program should also establish appropriate underwriting standards to comply with FCA Regulation 614.4150. There are a number of safety and soundness and regulatory issues that examiners need to consider when evaluating institution programs for meeting farmers’ other credit needs. In addition to the discussion of these issues, Attachment 1 provides a list of examples of financing for nonagricultural purposes and whether they would likely be in compliance with 613.3005. A workpaper listing criteria to consider in examining a System institution's other credit needs financing program is provided at the end of this document.


EXAMINATION GUIDANCE

Board Policy and Internal Control Considerations

Financing for other credit needs should be provided in accordance with prudent lending practices and within board established parameters. As such, programs developed for other credit needs financing should have reasonable limitations and safety and soundness controls. An examiner’s evaluation of other credit needs financing should start with an assessment of the institution’s internal controls. Examiners should expect to see:

A review of these factors, as well as the results of internal audit/review activities, will help the examiner determine the level of individual loan testing needed to determine compliance with program and regulatory requirements.

Regulatory Considerations

The institution’s policy and program for other credit needs financing should also address a number of regulatory issues. In evaluating other credit needs programs, examiners should expect to see guidance that addresses the degree of agricultural involvement, loan purpose, and the amount of financing that can be provided, and defines key terms, as outlined below. Examiners should also expect the institution to document the basis for other credit needs lending in the loan file, including the basis for the borrower’s designation as a full or less than full-time farmer, support for the loan purpose, and the determination of the amount of other credit needs financed.

1. Agricultural Involvement
Assets
2. Purpose
Family Needs
Nonagricultural Activities
3. Amount of Financing

Financing farmers’ other credit needs in accordance with the law, regulations, and sound business practices is beneficial to enhance or support the economic vibrancy of agriculture and rural communities. The principle objectives of a board-approved program should be to provide financing necessary to ensure full-time farmers receive sound and constructive credit to support their full needs and that part-time farmers are provided appropriate financing to allow them to remain in agriculture and a rural community. In addition, the programs should be targeted toward ensuring the flow of funds into rural areas and tailored to the conditions in the institution’s lending territory. If an institution develops an other credit needs lending program consistent with the guidance in this document, examiners should consider the collective loans made to a borrower under the program to be "primarily agricultural loans" and consistent with 613.3005.


October 17, 2006 Thomas G. McKenzie
Date Thomas G. McKenzie Chief Examiner

Attachment 1

Examples

The following examples highlight the characteristics of loans that may be found during review of an “other credit needs” lending program and whether they would likely be consistent with FCA Regulation 613.3005. These examples are designed to be illustrative only and reflect how a program that allows lending for nonagricultural purposes up to the value of agricultural assets could be applied. Other programs could be structured differently. To ensure regulatory compliance, examiners should consider the totality of circumstances (such as the extent of the borrower's agricultural activities and the parameters of the System institution's program for nonagricultural credit) when evaluating an actual loan for nonagricultural needs. In reviewing any program, examiners should use reasonable judgment in evaluating the level of nonagricultural lending that is appropriate. For example:

1. Facts: A part-time farmer with $30,000 of gross farm income, $200,000 of agricultural real estate, $100,000 of agricultural loans requests $75,000 to finance the purchase of a restaurant in a town of 5,000 people. He does not plan to expand his farming operation but plans to continue to farm. Analysis: The amount of financing is less than the value of agricultural assets, and the purpose of the loan contributes to the part-time farmer’s ability to remain in agriculture and enhances the flow of funds into a rural area, even though the borrower does not expect to become more involved in farming. Result: This loan is likely consistent with 613.3005.

2. Facts: Same as Number 1, but only $50,000 of agricultural loans. Analysis: Although the nonagricultural portion of the loans is larger than the agricultural portion, the amount of financing is significantly less than the total value of the borrower's agricultural assets, and the purpose of the loan improves the borrower’s ability to remain involved in farming and enhances the flow of funds into a rural area. Result: This loan is likely consistent with 613.3005.

3. Facts: A part-time farmer with $1,000 of gross farm income from cattle, $100,000 of agricultural assets, and $50,000 of agricultural loans requests $100,000 to finance an apartment building in a town of 10,000 people. She has documented plans to expand her farming operation and generate additional farm income in future years. Analysis: The borrower’s primary vocation is currently something other than farming but is moving toward more active farm involvement, and the purpose of the loan contributes to her ability to remain on the farm. Result: This loan is likely consistent with 613.3005.

4. Facts: A borrower owns agricultural property that is valued at $2.0 million on the outer fringe of a large metropolitan area and would like to borrow $1.0 million for an apartment building in the city. The property is currently in the Conservation Reserve Program and the borrower plans to maintain some of the land in the program and sell the rest for development, using the proceeds to repay the loan. While actively farming in the past, the borrower now plans to move out of farming and the remaining property would not be maintained as an agricultural asset. Analysis: The nonagricultural business does not improve the borrower’s ability to remain in farming nor does it enhance the flow of funds into a rural area. Also, the borrower, whose business is essentially other than farming, could receive credit only for agricultural purposes. Result: This loan would likely not be consistent with 613.3005.

5. Facts: A borrower with gross farm income of $300,000 and revenue from a farm equipment dealership of $500,000 requests financing of $2.0 million to start a manufacturing business in a community of 30,000 people. Agricultural assets total $1.5 million, and nonagricultural assets total $2.5 million. Although the borrower’s gross farm income is less than the revenue from the farm equipment dealership, he spends the majority of his time operating his farm and views it as his primary occupation. Analysis: This borrower could likely qualify as a full-time farmer and, as such, would be able to obtain full financing for both agricultural and nonagricultural needs. Result: This loan would likely be consistent with 613.3005.

6. Facts: An investor who lives in Chicago and owns $1.0 million of agricultural real estate requests financing for $500,000 to purchase an auto supply store in the Chicago metropolitan area. Although the borrower derives farm income from leasing the agricultural property, he plans to sell off most of his agricultural real estate to open a chain of auto supply stores. Analysis: The investor is essentially other than a farmer, and the purpose of the loan would not result in funds flowing into a rural area. Result: This loan would likely not be consistent with 613.3005.

7. Facts: A part-time farmer with agricultural assets (primarily land) valued at $750,000, gross farm income of $5,000 from hay sales, and no existing financing relationship with a Farm Credit System institution requests a loan for $750,000 to expand his commercial business in a rural community with a population of 15,000 people. Analysis: The amount of financing is not more than the value of agricultural assets, and the purpose of the loan contributes to the part-time farmer’s ability to remain in agriculture and a rural area. Result: This loan would likely be consistent with 613.3005.

Other Credit Needs Workpaper.pdf EB 2006-2.pdf

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