FSA Guaranteed Loan Program

FSA guaranteed loans provide Kinderhook State Bank with a guarantee of up to 95 percent of the loss of principal and interest on a loan. Farmers and ranchers apply to Kinderhook State Bank which then arranges for the guarantee. The FSA guarantee program is designed add stability to the agricultural economy.

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.

Loan Purposes

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 restructure 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 restructure debts under certain conditions.

Maximum Loan Size

FSA can guarantee OLs or FO loans up to $852,000 (amount adjusted annually based on inflation).

Borrower Eligibility

To qualify for an FSA Guarantee, a loan applicant must:

      be a citizen of the United States

      have an acceptable credit history.

      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.

What Other Criteria Does FSA Consider?

In addition to meeting the eligibility criteria, the loan applicant must have a satisfactory credit history, demonstrate repayment ability, and provide sufficient security for the loan.

If the Producer Qualifies, What Next?

The following actions are usually taken as part of the application process:

1.       The producer and Kinderhook State Bank complete the guaranteed application and submit it to FSA.

2.       FSA reviews the application for eligibility, repayment ability, security, and compliance with other regulations.

3.       FSA approves and obligates the loan.

4.   Kinderhook State Bank receives a conditional commitment indicating funds have been set aside, and the loan may be closed.

5.       Kinderhook State Bank closes the loan and advances funds to the producer.

6.  FSA issues the guarantee.
Loan Terms and Interest Rates

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.

The Guaranteed loan interest rate and payment terms are negotiated between Kinderhook State Bank 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.

Security

Each loan must be adequately secured. Collateral for OLs consists of a first lien on crops to be produced and on livestock and equipment purchased or refinanced with loan funds. A lien may be taken on certain other chattel and real estate property, and an assignment usually will be taken on income such as that from a dairy enterprise. Collateral for FO loans consists of real estate only or a combination of real estate and chattels. FSA staff determine whether the collateral proposed by the Kinderhook State Bank is adequate.

Is this the Lender's Loan or an FSA Loan?

Guaranteed loans are the property and responsibility of Kinderhook State Bank  Kinderhook State Bank makes the loan and services it to conclusion. If successful, the borrower is able to repay the loan and no taxpayer money will be used except for administrative expenses. If a loan fails, and Kinderhook State Bank suffers a loss, FSA will reimburse the Kinderhook State Bank with Federal funds according to the terms and conditions specified in the guarantee.

What Happens if the Loan Becomes Delinquent or the Borrower Defaults?

Kinderhook State Bank must notify FSA when a borrower is 30 days overdue on a payment and is unlikely to bring the account current within 60 days, or if a loan is otherwise a problem. Kinderhook State Bank makes every attempt to work with the borrower to resolve any problems.

Percent of Guarantee

For most loans, the maximum guarantee is 90 percent. The guarantee percentage will be determined by FSA based on the risk involved in the loan. Kinderhook State Bank may receive a 95 percent guarantee when:

1. The purpose of the loan is to refinance direct FSA farm credit program debt. If only a portion of the loan is for this purpose, a weighted percentage of guarantees will be used.

2. The loan is made to a beginning farmer to participate in the beginning farmer down payment loan program or a qualifying State beginning farmer program.

Guarantee 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 Down-payment 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. Kinderhook State Bank may resell the guaranteed portion of the loan to an interested party. The interested party then becomes the Holder of the loan, but Kinderhook State Bank 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.

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 Community Investing. Selling the loan on the secondary market frees the funds for additional lending or investing activity.

      Enhanced Loan Terms and Rates. The Secondary Market enhances Kinderhook State Bank's loan products terms and rates.

Increased Lending or Investing Capabilities.

Since the guaranteed portion of the loan is not applied against Kinderhook State Bank's lending limit, it can be used to expand our lending capabilities.

Rates and Terms. Kinderhook State Bank may be able to offer the producer more flexible repayment terms, as well as fixed and/or reduced interest rates to improve cash flow.

 

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