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Type: Bookletter

BL-058
Financing Agricultural Land in Transition (in the Path of Development) -- Eligibility and Scope of Financing Considerations
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May 28, 2009


To: Chairman, Board of Directors
From: Leland A. Strom
Subject: Financing Agricultural Land In Transition (in the Path of Development) – Eligibility and Scope of Financing Considerations

This Bookletter provides guidance on how institutions should ensure compliance with the eligibility and scope of financing regulations when loan funds will be used to purchase or refinance land in transition. Land in transition is agricultural land that lies in the path of development. In some cases, this may involve land changing ownership several times before ultimately transitioning out of agriculture. Questions frequently arise concerning the application of eligibility and scope of financing regulations when evaluating an applicant’s request for financing. While financing land in transition may occur, the Farm Credit Administration (FCA) has consistently directed that Farm Credit System (FCS or System) institutions may not provide development financing that converts agricultural land to non-agricultural uses, except in very rare instances.

This Bookletter also provides useful information for making other scope of financing decisions and supplements the guidance found in the Examination Bulletin FCA 2006-2. The Examination Bulletin was developed to provide examiners guidance for evaluating programs that System institutions use in meeting the other (i.e., non-agricultural) credit needs of farmers, ranchers, and producers or harvesters of aquatic products.

It is important to note that neither Examination Bulletin FCA 2006-2 nor this Bookletter were developed to address the safety and soundness risks associated with financing land in transition. The FCA plans to issue further safety and soundness guidance in this area in the near future.

Eligibility and Scope of Financing Rules

The eligibility and scope of financing rules contained in 12 C.F.R., Part 613, Subpart A, address System funding for farmers, ranchers, and aquatic producers or harvesters. More specifically, 613.3005 addresses the System’s lending objective and provides parameters for financing the agricultural and non-agricultural needs of full- and part-time farmers (see Attachment). These parameters primarily focus on the applicant’s status as a full- or part-time farmer, which is determined by analyzing the totality of the farmer’s existing operation and the impact of the loan request. After a System institution has completed the eligibility analysis, it is able to determine the appropriate scope of financing (i.e., amount and type) that can be offered.

Section 613.3005 of FCA’s regulations specifically notes that System institutions should only finance the agricultural credit needs of an applicant “whose business is essentially other than farming.” However, the factors for making these determinations are not always readily apparent, making these determinations challenging – particularly when land in transition is involved. Accordingly, this Bookletter serves to provide additional guidance for determining whether an applicant’s business is essentially other than farming; whether the property purchased is agricultural land; and whether the purpose of the loan request meets an agricultural need.

Policy Guidance – Controls Over Financing Land In Transition

Scope of financing determinations must be evaluated on a pro forma or “forward looking” basis. In other words, an institution’s lending staff should determine what the applicant’s operation would look like if the loan is approved and funded. Therefore, System institutions should ensure their lending policies and procedures require that the following determinations be made prior to financing land in transition:

To help guide these determinations, the following sections outline more specific guidance in evaluating the person, property, and purpose.

Analysis of the Person

As previously noted, 613.3005 requires that a lender make a determination about an applicant’s involvement in agriculture before financing a request for credit, including those involving land in transition. An institution’s eligibility and scope of financing policies and procedures should address the following considerations in making this determination:

Analysis of the Property

Section 619.9025 of FCA’s regulations defines agricultural land as “land improved or unimproved which is devoted to or available for the production of crops and other products such as but not limited to fruits and timber or for the raising of livestock.” Determining whether the property being purchased (or refinanced) meets this regulatory definition is important in establishing the eligibility and scope of financing for an applicant. To aid in making this determination, an institution’s eligibility and scope of financing policies and procedures should address the following factors:

Analysis of the Purpose

An analysis of the purpose of the loan is critical to evaluating financing for less than full-time farmers. FCS institutions must fully analyze and document to what extent the loan will fulfill an agricultural need. This analysis is critically important once an FCS institution has determined that an applicant requesting a loan for land in transition is a person “whose business is essentially other than farming.” An institution’s eligibility and scope of lending policies and procedures should address the following issues to help lending staff make these determinations:

Decisions Based on the Totality of the Circumstances

System institutions must ensure that their policies and procedures provide adequate guidance to lending staff for the analysis of eligibility and scope of financing determinations. The analysis supporting these determinations should be documented and encompass the totality of the circumstances surrounding the loan request, including the person, property, and purpose as outlined above.

In conclusion, the guidance contained in this Bookletter does not prevent a board of directors from establishing conservative policy direction for land-in-transition financing. Each FCS institution board of directors needs to continue to evaluate its policy direction in consideration of their institution’s current lending environment, risk bearing capacity, and appropriateness of land-in-transition financing for its chartered territory.

Please distribute copies of this Bookletter to your board of directors, discuss its contents, and make adjustments, as appropriate, to your policies and procedures as discussed above.

If you have any questions about the guidance contained in this Bookletter, please contact Barry Mardock, Associate Director, Office of Regulatory Policy, at (703) 883-4456 (mardockb@fca.gov), or Andrew Jacob, Director, Office of Regulatory Policy at (703) 883-4356 (jacoba@fca.gov).

Attachment





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1See 12 C.F.R. 619.9025.
Attachment


PART 613 - ELIGIBILITY AND SCOPE OF FINANCING

Subpart A - Financing Under Titles I and II of the Farm Credit Act

613.3005 Lending objective.
It is the objective of each bank and association, except for banks for cooperatives, to provide full credit, to the extent of creditworthiness, to the full-time bona fide farmer (one whose primary business and vocation is farming, ranching, or producing or harvesting aquatic products); and conservative credit to less than full-time farmers for agricultural enterprises, and more restricted credit for other credit requirements as needed to ensure a sound credit package or to accommodate a borrower's needs as long as the total credit results in being primarily an agricultural loan. However, the part-time farmer who needs to seek off-farm employment to supplement farm income or who desires to supplement off-farm income by living in a rural area and is carrying on a valid agricultural operation, shall have availability of credit for mortgages, other agricultural purposes, and family needs in the preferred position along with full-time farmers. Loans to farmers shall be on an increasingly conservative basis as the emphasis moves away from the full-time bona fide farmer to the point where agricultural needs only will be financed for the applicant whose business is essentially other than farming. Credit shall not be extended where investment in agricultural assets for speculative appreciation is a primary factor.

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