Loan Set Asides


Program Basics

Over the past two decades Congress has established target participation rates and loan fund set-asides for both beginning and socially disadvantaged farmers and ranchers within the direct and guaranteed farm ownership and operating loan programs. The purpose of reserving funds for these borrowers is to help target these government credit programs to those most in need of credit assistance, to ensure that socially disadvantaged and beginning farmers and ranchers can obtain access to credit, and to help change the structure of agriculture by helping to reverse the aging of American agriculture and the loss of minority land ownership. In addition to loan set asides, Congress has also given beginning and socially disadvantaged farmers and ranchers a preference in acquiring land out of government inventory. Congress first established target participation rates for farm ownership loans for socially disadvantaged producers in 1987, and the rest of the set-asides for beginning and socially disadvantaged producers in 1990 and 1992.

2008 Farm Bill Changes

The 2008 Farm Bill increases the percentage of loan funds reserved for beginning farmers and ranchers to:

  • 75 percent for direct farm ownership loans, up from 70 percent;
  • 40 percent for guaranteed farm ownership loans, up from 25 percent; and
  • 50 percent of direct operating loans, up from 35 percent.

The 2008 Farm Bill also makes socially disadvantaged farmers eligible on a priority basis to purchase inventory property during the same 135 day period of time that beginning farmers are so eligible.

Key Aspects of the Preference Provisions

Direct Farm Ownership Loans – Each year 75 percent of the total loan funds available are reserved for beginning farmers and ranchers for the first 11 months of the fiscal year. If all of those reserved funds are not required by beginning farmers, USDA may use any funds remaining in the final month of the fiscal year to make loans to other qualified borrowers.

Of the 75 percent, two-thirds (i.e., 50 percent of the total) is reserved exclusively for down payment loans and joint financing agreement loans for the first half of the fiscal year. After April 1 of each year, if there are loan funds remaining they may be made available for regular beginning farmer farm ownership loans.

For socially disadvantaged producers, the target participation rate is determined by the percent of total socially disadvantaged people living in a particular county. For instance, if the percentage of African-Americans living in County X is 50 percent, then the target participation rate for ownership loans for socially disadvantaged producers living in that county is 50 percent.

For counties within the boundaries of a Native American reservation, the target participation rates are based on a reservation-wide basis. The target participation rate for women producers, who are included in the definition of socially disadvantaged for credit program purposes, is set based on the percent of women farmers in the state relative to the total number of farmers in that state. Thus, if 8 percent of farmers in State X are women, then the target participation rate is 8 percent. Target participation rates for socially disadvantaged producers are in effect for the entire fiscal year.

The reserves for socially disadvantaged producers that are not used within a state are made available for socially disadvantaged producers in other states, or are re-pooled within the same state for other purposes.

Direct Farm Operating Loans – Each year 50 percent of total loan funds available are reserved for beginning farmers and ranchers for the first 11 months of the fiscal year. If all of those reserved funds are not required by beginning farmers, USDA may use any funds remaining in the final month of the fiscal year to make loans to other qualified borrowers.

For socially disadvantaged producers, the target participation rate is determined by the percent of socially disadvantaged producers in a state relative to the total number of farmers in that state (this includes all who are defined as socially disadvantaged, including women and members of racial and ethnic minorities). The reserves for socially disadvantaged producers that are not used within a state are made available for socially disadvantaged producers in other states, or are re-pooled within the same state for other purposes.

Guaranteed Farm Ownership and Operating Loans – Each year 40 percent of total loan funds available for guaranteed farm ownership loans and 40 percent of total loan funds available for guaranteed farm operating loans are reserved for beginning farmers and ranchers for the first half of each fiscal year. After April 1 of each year, any unused funds then become available for any type of guaranteed ownership or operating loan.

In each fiscal year, if there are unused guaranteed farm operating loan funds as of August 1, USDA will make those funds available for beginning farmers seeking a down payment real estate loan if appropriated funds for down payment loans are already extinguished. On September 1 of each year, if there are still unused guaranteed operating loan funds available, USDA will make those funds available for any type of beginning farmer ownership loan.

Inventory Property Sales – If the government acquires farmland through foreclosures this “inventory” property is advertised for sale within 15 days of government acquisition. Eligible beginning and socially disadvantaged farmers and ranchers are given first priority to purchase these properties at their appraised market value during the first 135 days the land is on the market. If more than one eligible beginning or socially disadvantaged producer offers to purchase the same property during that period of time, a buyer is chosen at random. USDA may divide or combine inventory properties to maximize new farming opportunities. USDA can also lease the land to a beginning or socially disadvantaged farmer until such time as funding is available for them to receive a direct farm ownership loan with which to purchase the property. If the 135 day period expires without a buyer, the land is open for public sale to any buyer.

Section 5302 of the Food, Conservation, and Energy Act (FCEA) of 2008 amends Section 346(b)(2) of the Consolidated Farm and Rural Development Act to increase the beginning farmer loan set aside rates, to be codified at 7 U.S.C. Section 1994 (b)(2), and amends Section 335(c) of the Consolidated Farm and Rural Development Act to add socially disadvantaged farmers to the inventory land sale preference, to be codified at 7 U.S.C. Section 1985.

Funding

The amounts available each fiscal year for direct and guaranteed farm ownership and operating loans is determined by the annual agricultural appropriations bill. In recent years, appropriations had averaged about $225 million and $635 million, respectively, for direct farm ownership and direct farm operating loans. However, during the current recession and financial crisis, those amounts have increased to about $650 million and $1 billion dollars a year. Appropriations for guaranteed farm ownership loans and for guaranteed operating loans have averaged between $1 billion and $1.5 billion a year.

Implementation Basics

The Farm Bill changes described above were included in a final rule published in the Federal Register on December 8, 2008.   Funding levels will be determined by the annual appropriations process.

Additional Resources

The Farm Service Agency of USDA administers the direct and guaranteed loan programs. Additional information about the programs is posted on the FSA website under Farm Loan Programs.

To locate your state or county FSA offices, visit this website