Finance and Credit – An Overview
Farmers often borrow large amounts of capital and incur sizeable debts in order to operate and maintain their farming operations. Therefore, the complex network of state and federal statutes, regulations, case law, and lending institutions that comprise the area of farm credit is significant to those involved in all aspects agricultural production.
Sources of Agricultural Capital
The largest sources of capital for agricultural producers are (1) commercial banks, (2) the Farm Credit System, (3) the Farm Service Agency, and (4) insurance companies. Additional sources of agricultural credit include individuals, cooperatives, processors, and agricultural machinery and input suppliers.
The Farm Credit System
The Farm Credit System (“FCS”) is a network of federally-chartered, privately-owned banks and associations that provide short- and long-term loans to eligible agricultural producers and their cooperatives. See generally 12 U.S.C. §§ 2001-2279cc (setting forth statutory provisions governing the Farm Credit System). Prior to the creation of FCS, lenders avoided agricultural borrowers because of the risks inherent in the agriculture industry. To combat this, the Federal Farm Loan Act of 1916 created the FCS and the System has undergone many changes since its creation. See Christopher R. Kelley & Barbara J. Hoekstra, A Guide to Borrower Litigation Against the Farm Credit System and the Rights of Farm Credit System Borrowers, 66 N.D. L. Rev. 127–49 (1990) (providing an excellent overview of the complex history and development of the Farm Credit System). The original purpose of the FCS has not changed:
It is declared to be the policy of the Congress, recognizing that a prosperous, productive agriculture is essential to a free nation and recognizing the growing need for credit in rural areas, that the farmer-owned cooperative Farm Credit System be designed to accomplish the objective of improving the income and well-being of American farmers and ranchers by furnishing sound, adequate, and constructive credit and closely related services to them, their cooperatives, and to selected farm-related businesses necessary for efficient farm operations. 12 U.S.C. § 2001(a).
The FCS is composed of four Farm Credit Banks that make direct, long-term real estate loans through six Federal Land Bank Associations. Federal Land Bank Associations are local, producer-owned cooperatives from which eligible producers can obtain loans and financing.
The FCS also provides loan funds to Agricultural Credit Associations (ACAs), Production Credit Associations (PCAs), Federal Land Credit Associations (FLCAs), as well as one Agricultural Credit Bank. Agricultural Credit Associations (ACAs) are associations formed from the merger of at least one stand-alone Federal Land Bank Association, referred to as a FLCA, and at least one PCA. Because of this structure, ACAs have the power to issue agricultural production and real estate mortgage loans of varying term length, from short- to long-term. PCAs are local associations that provide short-term loans directly to producers and farm-related businesses from funds received from Farm Credit Banks. PCAs also provide short-term and intermediate-term loans to producers from funds received from investors in money markets. A Federal Land Credit Association (FLCA) is a federal and state tax exempt association that has the authority to make direct, long-term real estate loans. The Agricultural Credit Bank provides all types of loans to agricultural and aquacultural rural cooperatives and has the authority to finance agricultural exports and to provide international banking services for producer-owned cooperatives.
The FCS also provides loan funds to Production Credit Associations, Agricultural Credit Associations, Federal Land Credit Associations, and one Agricultural Credit Bank. Production Credit Associations are local associations that provide short-term loans directly to producers and farm-related businesses from funds received from Farm Credit Banks. Production Credit Associations also provide short-term and intermediate-term loans to producers from funds received from investors in money markets. Agricultural Credit Associations are associations formed from the merger with at least one Federal Land Bank Association and at least one Production Credit Association and are authorized to make long-term real estate mortgage loans. A Federal Land Credit Association is an association that has the authority to make direct, long-term real estate loans. The Agricultural Credit Bank provides all types of loans to agricultural and aquacultural cooperatives and has the authority to finance agricultural exports and to provide international banking services for producer-owned cooperatives.
The FCS is organized as a cooperative and is supervised and regulated by the Farm Credit Administration (“FCA”). The FCA is not an agency within the USDA but rather an agency within the executive branch of the federal government. To learn more about the FCA and the FCS, visit https://www.fca.gov/. See also 12 C.F.R. pts. 600-655 (setting forth guidelines and requirements governing the Farm Credit Administration).
Farm Service Agency
The Farm Service Agency (“FSA”) is an agency within the USDA. One of the functions of the FSA is to administer the federal loan programs for farmers, among many other functions. The FSA is intended to serve as a lender of last resort for farmers who cannot otherwise obtain commercial loans at reasonable rates. This demographic often includes young or beginning farmers or farmers who do not have sufficient financial resources to obtain a conventional commercial loan. The FSA offers two types of loans: direct and guaranteed.
Under the guaranteed loan program, the FSA guarantees up to ninety-five percent of losses on certain types of loans made by commercial lenders to farmers. Thus, guaranteed loans involve a direct relationship between the farmer and the commercial lender. There are two types of guaranteed loans: farm ownership and operating loans.
Guaranteed farm ownership loans are available for buying farmland, building and repairing buildings and other fixtures, developing farmland for soil and water conservation purposes, and refinancing debt. Guaranteed operating loans are available for purchasing items necessary to maintain a successful farming operation, including livestock, equipment, feed, seed, fuel, fertilizer, pesticides, repairs, and insurance. Guaranteed operating loans can also be made to finance minor improvements to buildings, land and water development, family living expenses, and, subject to certain conditions, to refinance debt. See 7 C.F.R. pt. 762 (setting forth regulations governing guaranteed farm loans).
Farmers who are unable to qualify for a guaranteed loan may be eligible for a direct loan. Unlike guaranteed loans, direct loans involve a direct relationship between the farmer and the FSA. There are three types of common types of direct loans: farm ownership, operating, and emergency loans. See 7 C.F.R. pt. 1943 (direct farm ownership loans); 7 C.F.R. pt. 1941 (direct operating loans); 7 C.F.R. pt. 764 (emergency loans). Direct farm ownership loans are available for purchasing farmland, constructing and repairing buildings or other fixtures, and promoting soil and water conservation. Similar to guaranteed operating loans, direct operating loans are made for purchasing items necessary to maintaining a successful farming operation, specifically including the same items covered under by guaranteed operating loans. Emergency loans are direct loans that are available to farmers who are unable to obtain from other credit sources the funds needed to remedy the damage caused by adverse weather or other natural disasters.
Other types of farm loans through FSA include Microloans and Native American Tribal Loans. For short descriptions of each of the available FSA loans, please visit the FSA website here.
Farm Credit and Discrimination
The Equal Credit Opportunity Act (“ECOA”), 15 U.S.C. §§ 1691-1691f, prohibits creditors from discriminating on a “prohibited basis” against an applicant with respect to any aspect of a credit transaction. Specifically, the ECOA provides the following:
It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction-
(1) on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract);
(2) because all or part of the applicant’s income derives from any public assistance program; or
(3) because the applicant has in good faith exercised any right under this chapter.
The ECOA defines a “creditor” as “any person who regularly extends, renews, or continues credit; any person who regularly arranges for the extension, renewal, or continuation of credit; or any assignee of an original creditor who participates in the decision to extend, renew, or continue credit.” Id. at § 1691a(e). Thus, the term “creditor” is broadly defined and essentially includes all creditors, including the FSA. Any creditor who violates the ECOA may be subject to an individual or class action for actual and punitive damages, an action for equitable and declaratory relief, and an assessment of costs and attorney fees. See id. at 1691e.