USDA Warned of Unintended Consequences to Forgiving Loans

LUBBOCK, TX – Bankers and lending groups are calling on USDA to exercise caution when implementing Section 1005 of the American Rescue Plan. According to the Independent Community Bankers of America (ICBA), the provision requires USDA to pay off direct and guaranteed farm loans for Socially Disadvantaged Farmers and Ranchers by providing up to 120 percent of the outstanding indebtedness for each borrower. USDA has sent a letter to all guaranteed lenders noting the agency is establishing a process for these loan payments but the ICBA says the sudden, abrupt payoff of any category of guaranteed loans could have adverse consequences for lenders participating in USDA’s guaranteed loan programs or acting as secondary market purchasers of the loan guarantees. Recognizing lenders’ costs of funding and servicing loans, the bankers suggest that USDA should ensure lenders are made whole by being compensated for lost income due to these loan payoffs and purchasers of USDA loan guarantees in the secondary market should be paid for lost premium values. The American Bankers Association suggests that a large community bank that has a farm/ranch portfolio of over $200 million could lose millions of dollars in net income per year if their portfolio of loans is quickly paid off. A smaller community bank with over $10 million in farm/ranch loans comprising over ten percent of their portfolio could see an annual loss of net income of over $300,000 per year for several years. The bankers explain that if not implemented properly, USDA’s actions could severely damage the secondary market by making the market unreliable and pricing unpredictable thus causing a significant loss of available capital for lending under the programs harming all guaranteed borrowers as well as the overall integrity of USDA’s guaranteed programs.
(SOURCE: All Ag News)