Summary
FSA guaranteed loans provide lenders (e.g., banks, Farm Credit System institutions, credit unions) with a guarantee of up to 95 percent of the loss of principal and interest on a loan. Farmers and ranchers apply to an agricultural lender, which then arranges for the guarantee. The FSA guarantee permits lenders to make agricultural credit available to farmers who do not meet the lender's normal underwriting criteria.
FSA guaranteed loans are for both Farm Ownership and Operating purposes. Like the Direct Loan Program, a percentage of Guaranteed Loan funds is targeted to beginning farmers and ranchers and minority applicants.
Eligible Applicants
To qualify for an FSA Guarantee, a loan applicant must:
- be a citizen of the United States (or legal resident alien), which includes Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, and certain former Pacific trust Territories.
- have an acceptable credit history as determined by the lender.
- have the legal capacity to incur the obligations of the loan.
- be unable to obtain a loan without a guarantee.
- not have caused FSA a loss by receiving debt forgiveness on more than 3 occasions.
- be the owner or tenant operator of a family farm after the loan is closed. For an OL, the producer must be the operator of a family farm after the loan is closed. For an FO Loan, the producer needs to also own the farm.
- not be delinquent on any Federal debt. Entities (corporations, cooperatives, joint operations, partnerships, trusts, and limited liability companies) and their members/stockholders must meet these same eligibility requirements. The entity must also be authorized to operate a farm or ranch in the State where the land is located.
Eligible Uses
- Farm Ownership Loans
Guaranteed Farm Ownership (FO) Loans may be made to purchase farmland, construct or repair buildings and other fixtures, develop farmland to promote soil and water conservation, or to refinance debt.
- Operating Loans
Guaranteed Operating Loans (OL) may be used to livestock, farm equipment, feed, seed, fuel, farm chemicals, insurance, and other operating expenses. Operating Loans can also be used to pay for minor improvements to buildings, costs associated with land and water development, family living expenses, and to refinance debts under certain conditions.
Loan Amounts
FSA can guarantee Operating Loans or Farm Ownership Loans up to $813,000 (amount adjusted annually based on inflation).
Terms
Repayment terms vary according to the type of loan made, the collateral securing the loan, and the producer's ability to repay. OLs are normally repaid within 7 years and FO loans cannot exceed 40 years.
Interest Rate
The Guaranteed loan interest rate and payment terms are negotiated between the lender and the borrower. Interest rates on these loans may not exceed the rate charged the lender's average farm customer. In addition, under the Interest Assistance Program, FSA will subsidize 4 percent of the interest rate on loans to qualifying borrowers.
Fees
For most loans, FSA charges a guarantee fee of 1 percent of the guaranteed portion of the loan. This fee may be passed on to the borrower. The guarantee fee is waived for:
- Interest assistance loans
- Loans where more than 50% of the loan funds are used to pay off direct FSA loan debt
- Loans in conjunction with a Downpayment Farm Ownership Loan program for beginning farmers or a qualifying state beginning farmer program. This fee waiver does not extend to all beginning farmers.
Secondary Market
The secondary market for USDA guaranteed loans is a key feature of the guaranteed lending program. The lender may resell the guaranteed portion of the loan to an interested party. The interested party then becomes the Holder of the loan, but the original lender must retain the loan servicing responsibilities. Investors who are looking for safe investments with a reasonable return are attracted to these loans because of the Government's full Faith and Credit guarantee against default. The existence of the secondary market makes guaranteed loan notes more liquid. By reselling the guaranteed portions, lenders reduce interest rate exposure, increase their lending capabilities, and generate fees.
Advantages of Using the Secondary Market
The existence of the secondary market is a strong inducement for lenders to become involved in guaranteed lending. Selling the guaranteed portion of the loan to other investors offers a number of advantages, including:
- Reduced Interest Rate Risk. Lenders can transfer risk of interest rate increases on the guaranteed portion of a fixed rate loan.
- Increased Liquidity. Selling the loan on the secondary market frees the funds for additional lending or investing activity.
- Increased Lending or Investing Capabilities. Since the guaranteed portion of the loan is generally not applied against a bank's lending limit, it can be used to expand lending capabilities.
- Increased Return on Investment. The sale of the guaranteed portion of the loan in the secondary market increases the lender's overall return on investment. Each time a bank sells a guaranteed portion, it generally retains a servicing fee.
- Rates and Terms. Lenders may be able to offer the producer more flexible repayment terms, as well as fixed and/or reduced interest rates to improve cash flow.