NSAC Comments on FSA Microloan Proposal
July 26th, 2012
On Tuesday, July 24th, the public comment period closed on the Farm Service Agency’s (FSA) proposed rule to modify their Farm Operating Loans program to include microloans in order to better address the needs of very small and beginning family farmers. FSA — a USDA agency in charge of federal credit and other agricultural programs — has historically made larger operating loans up to $300,000 to cover large farm expenses such as tractors, livestock, feed, and chemical inputs. For the new microloan program, FSA proposes that the maximum loan limit be $35,000 and would be intended for smaller purchases such as seeds, animals, small equipment, or other investments that would jump start a small farm operation.
According to a national survey of young and beginning farmers, lack of capital is the biggest obstacle to financially viable farming. Many commercial lenders typically shy away from lending smaller amounts of money due to unfamiliarity with the expenses and profitability of diversified operations, perceived financial risk of these “unconventional” operations, and smaller returns on investments for smaller loans. With few alternative credit options, small and beginning farmers often rely on personal credit cards to finance many of their on-farm expenses, and are subject to high interest rates.
Over the past few years, NSAC has worked with partner organizations, including the National Young Farmers’ Coalition, California FarmLink, and many others, to develop alternative financing proposals that would better accommodate the credit needs of small, young, and beginning farmers. Microlending is one such financing option which has gained traction in other sectors, such as the international development field, and has started to gain popularity within the agricultural sector in the United States. Institutions like California FarmLink and the Carrot Project in Massachusetts have entered into the microlending business, and with the announcement of FSA’s proposed rule, NSAC is pleased that USDA is positioned to do so as well.
In response to the call for public comments on this proposed rule, NSAC surveyed its members and other organizations with expertise in microlending to farmers and developed specific recommendations to help guide FSA in establishing this new program and suggest ways to make microloans an effective credit tool for small and beginning farmers.
Some of NSAC’s comments and recommendations include the following:
- FSA should provide formal training and resources to local loan officers in order to ensure they have the expertise required to make loans to non-traditional borrowers. Local officers should also have access to and be encouraged to utilize outside resources such as state FSA offices and agriculture organizations that can better familiarize them with diversified farming operations.
- FSA should be required to track and publish information on microloan borrower participation and the extent to which this program meets their credit needs. By collecting information such as type of operation, gross sales or revenue, number of years farming, etc., FSA will be capable of analyzing who is using and benefiting from the program to inform future implementation and to better meet borrower needs.
- Since most young, beginning, and small farmers are electronically savvy and receive much of their information from the internet, NSAC suggests that the microloan application and related materials be available online.
- FSA’s new rule grants additional flexibility in meeting the borrower experience eligibility requirements. NSAC appreciates the flexibility given by that rule but believes that microloan applicants should be required to either show at least one full-season of on-farm experience in order to qualify for a microloan, or qualify through existing eligibility criteria, including education or training plus experience. Additionally, FSA’s explanation of “apprenticeship” seems to more accurately reflect a mentorship, and NSAC hopes this will be clarified in the final rule.
- To ensure that new farmers and first-time borrowers obtain financial and credit management skills that will prevent them from defaulting on their small loans, FSA should require local loan officers to provide technical assistance to all microloan borrowers.
- All FSA borrowers are required to participate in a qualified production and financial management training program. NSAC would like to see FSA coordinate this borrower training requirement for microloans with financial management training programs funded through the Beginning Farmer and Rancher Development Program (BFRDP). This collaboration would serve to benefit new producers and would strengthen each program through cross participation.
- There is currently a provision included in the House Agriculture Committee’s version of the farm bill (H.R. 6083) to establish a cooperative lending pilot project within the microloan program that would allow non-profit organizations, banks, foundations, and other investors to serve as intermediary lenders. NSAC feels that these intermediary organizations would serve very effectively in making and servicing loans to borrowers, and could also provide technical assistance and business, financial, marketing and credit management services to borrowers.
The proposed rule closed for comments on July 24, 2012, and at closing, over 48 organizations, individual farmers, and financial institutions had submitted public comments on the rule. After the proposed rule is adapted to reflect these comments received by FSA, a final rule will be issued and program implementation will begin. NSAC will continue to monitor this program, and provide assistance and outreach to FSA in launching this new loan program.