The Agricultural Credit Act of 1987
| Publication year | 1988 |
| Pages | 611 |
| Citation | Vol. 17 No. 1 Pg. 611 |
1988, April, Pg. 611. The Agricultural Credit Act of 1987
On January 6,1988, President Reagan executed the Agricultural Credit Act of 1987 ("Act"),(fn1) more commonly referred to as H.R. 3030 or the "farm credit bailout." This article discusses important provisions of the Act, including Farm Credit System ("FCS") and Farmers Home Administration ("FmHA") borrower rights, loan restructuring, rights of leaseback and repurchase and the secondary market. Comment is also made on the interplay of the Act with the Bankruptcy Code, Colorado agricultural debtor relief legislation and case law.
The meaning of some of the provisions of the Act may be controversial. Although the author attempts to present all views, the reader should be aware that the author's orientation is that of debtor's counsel.
The majority of problem credits involve the FCS or FmHA and are thus directly affected by the law. To many of these debtors, the rights created by the new Act, particularly the right to restructure or modify a loan, may be as significant as rights under Chapter 12 bankruptcy and state agricultural debtor relief legislation.(fn2)
Other provisions of the new Act will have an effect on agriculture over the long term. In particular, the Act establishes the Federal Agricultural Mortgage Corporation, nicknamed "Farmer Mac," which will administer a secondary market to provide long-term agricultural loans to investor groups. The Act also (1) provides up to $4 billion in bond proceeds to finance recovery of the FCS system and (2) requires a massive restructuring of the approximately 400 FCS offices [Production Credit Associations ("PCAs") and Federal Land Bank Associations ("FLBs")]. It also provides for a merger of FCS offices with the Federal Intermediate Credit Bank ("FICB") in the same district.(fn3)
Farmer Mac may well revolutionize agricultural credit. The flexibility and opportunities for profit brought to the system by a secondary market should generate substantial interest from nontraditional lending sources, as well as provide traditional agricultural lenders with an opportunity to lessen risk and better balance portfolios. The net effect should be more and cheaper funds available for long-term agricultural loans.
Most observers foresee, for the first time in a decade, substantial lender competition for qualifying agricultural credits. An active, competitive, financial marketplace will be a marked change from the doom and gloom, gunpoint mentality which has pervaded so many agricultural lending relationships in the recent past. One day the marketing department at FCS might be larger than the liquidation department.
Of special concern to lawyers representing agricultural lenders and borrowers are the separate but similar borrower rights provisions of the FCS and FmHA.(fn4) These provisions have immediate and direct impact on FCS and FmHA borrowers, particularly on loans which are or will shortly be in foreclosure or some form of adversarial proceeding.
From the borrower's standpoint, any analysis of rights under the Act must include consideration of the relief available in bankruptcy (primarily Chapter 12) and under H.B. 1284 and S.B. 123.(fn5)
This legislation should be kept in mind in the discussion of borrower's rights.
The Act provides loan restructuring requirements for certain distressed FCS loans.(fn6) Restructuring is defined to include "rescheduling, reamortization, renewal, deferral of principal or interest, monetary concessions" or taking any other actions that will "make it probable that the operations of the borrower will become financially viable."(fn7) The Act provides that FCS "shall restructure" if it: determines that the potential cost of restructuring the loan is less than or equal to the potential cost of foreclosure(fn8)
In determining "cost of restructure," FCS is directed to "consider all relevant factors," including (1) the present value of foregone principal and interest; (2) administrative expenses; (3) whether the borrower furnished "complete and current" financial statements; and (4) whether the borrower presented a "preliminary restructuring plan and cash flow analysis" showing a "reasonable probability [of] orderly debt retirement."(fn9) Item (4) introduces an element of subjectivity (and therefore controversy) into the restructure calculation. It is likely that litigation will ensue over the feasibility issue.(fn10)
"Costs of foreclosure" include (1) the difference between the loan balance and "the liquidation value of the collateral," taking into consideration the borrower's "repayment capacity"; (2) the cost of maintaining the loan as nonperforming; (3) administrative, legal and broker fees; and (4) dimunition in collateral value as a result of foreclosure.(fn11)
The calculations and strategy involved in restructure negotiations and determinations are complex. FCS has, for instance, a fifteen-page policy with forms and computation sheets directed to this issue alone. FCS is currently notifying borrowers of their right to restructure. These notices contain appplication forms and financial information, together with a statement of "Distressed Loan Restructuring Policy" as required by the Act.(fn12)
When a decision to foreclose has been made, FCS must give forty-five days' notice of the borrower's right to submit a restructure plan that proposes to pay FCS as much or more than the cost of foreclosure. The notice must contain other rights of the borrower, including the right to hearing, the right to notice of the decision on restructure (with the reasons) and the rights of appeal within the system.(fn13)
Appeal rights are expanded by the new Act. Under the 1985 regulations, borrowers had the right to appeal from lending decisions only.(fn14) Under the new Act, both restructuring denials and the placing of a loan in nonaccrual status (if there are adverse consequences) can be appealed.(fn15) The borrower also has the right to a meeting and explanation of any changes in interest rate. Different time limits are applicable depending on the grounds of the appeal.(fn16) Additionally, the borrower is entitled, at his or her expense, to a new appraisal on appeal.(fn17) The appeal is to a "credit review committee." This now must include farmer representation, but it precludes participation by the loan officer involved in the initial decision in order to make the review more impartial.(fn18)
As a practical matter, the new provisions set forth rights similar to those contained in the 1985 regulations.(fn19) However, the need for further legislation was manifest. Congress appeared to be concerned that the FCS was not proceeding with restructuring as expeditiously as intended by the 1985 Act.(fn20) Moreover, the significance of the new Act is in the codification and enforceability of the provisions. Substantial questions existed concerning a borrower's ability to enforce the provisions of the 1985 regulations.(fn21) These questions may still exist. FCS may take the position that it is "debatable" whether a private right of action exists for violation of the terms of the new Act.(fn22)
In any case, the possibilities for restructuring eligible loans are quite broad under the new Act and leave room for creative financing plans. In practice, most FCS...
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