FARMERS HOME ADMINISTRATION
JOHN SMITHEE
FARMERS HOME ADMINISTRATION
A farmer who works his own section of cotton land south
of Lubbock realizes that he is soon going to need a new
tractor costing about $20,000.
It becomes apparent to the
farmer that he will need to borrow at least $15,000 of that
$20,000 before he can purchase the tractor.
So he goes to
his local small town bank, and the loan officer regretfully
tells him that there is simply no money now available for
loans of this type.
The farmer then turns to a larger bank
in Lubbock, which agrees to make the loan on the condition
that the farmer incorporate and pay an annual interest rate
of 13% on the loan.
The farmer realizes that he cannot afford
to pay the high interest rate, and is ostensibly left with no
chance of acquiring his new tractor.
A high school senior in eastern Arkansas would like to
raise a dozen or so hogs on his family's farm to make some
extra money in his spare time.
However, he has no capital to
get his venture off the ground.
The family farmhome of a farmer in eastern Oklahoma has
been destroyed by a tornado.
He has no money to rebuild and
the local banks have 'frozen' any new loans because of the
disaster.
An investor in Nebraska has recently acquired 1?00 acres
of grassland, and believes that part of this land would be
suitable for a feedlot.
However, it will cost around $200,000
-?-
just to prepare the preliminary facilities.
This investor
wants to get into the feedlot business, but is presently
drained of resources.
The owner of a 10,000 acre wooded mountain ranch in the
Colorado Rockies has an abundance of deer on his land, and
wants to sell deer leases to would-be hunters.
However, it
will cost $8,000 to construct a road from the main highway
to the area he has in mind.
He has no available cash and
is unable to find credit.
A rural community in Wyoming would like to attract more
business into its area, but there is insufficient water and
sewage for the existing population.
The town leaders see no
possible way of raising the needed money for the community
improvements.
All of the above entrepreneurs are in some way involved
in agribusiness in rural America and have felt the squeeze
of the proverbial "tight money· or "no money" crunch.
And,
all of the above are likely candidates for loans from the
Farmers Home Administration (hereinafter referred to as the
FmHA) .
The FmHA, established in 1946, is an agency which operates
as a part of the United States Department of Agriculture, and
which, as its main function provides credit for those in rural
America who are unable to get credit from other sources at
reasonable rates and terms,l
Another function of the FmHA is to assure that the bor-
-)-
rowers re ceive maximum benefit from this newly acquired
capital by providing them with counselling and technical
assistance from the agency.2
Hopefully. after temporary
initial participation in an FmHA program, the enterprising
agri-individual will be able to 'graduate' to conventional
channels of financing.)
This special need of government help in financing in
the area of agribusiness has been brought about by the very
nature of the business itself.
Agriculture has always been
a very risky and unpredictable venture.
Also, since most
major financial centers are far removed from the agricultural
heartland, bankers have been much more willing to assist
urban development than rural agriculture.
And, since
a griculture is unarguably essential to our national welfare,
the federal government felt compelled to step into the picture
in 1946, when many farmers began packing up and heading to
the city. to begin the FmHA.
The agency derives its powers and responsibilities largely from two sources: 4 the Rural Development Act 5 , and Title
V of the Housing Act of 1949. 6
The agency is headquartered
in the offiGes of the Department of Agriculture in Washington,
D.e., but the main office of the financing division is in
St. Louis, Mo.
Additionally, there are some 1,750 local
offices maintained throughout the United States, mostly in
county seats in agriculturally oriented areas.
(A branch
-4-
office is located in Lubbock)?
Although the primary purpose of the FmHA is to make loans
to individuals, there are certain instances where the
F~~
is not the 'maker' of the loan, but, instead, the 'guarantor'
of the loan.
Also, many times not only individuals, but
partnerships, corporations, and even communities can qualify
for FrnHA loans and programs. 8
FrnHA loans can be broken into two broad categories:
1)
Guaranteed loans--where the loan is made and serviced by a private lender.
Interest rates are deter-
mined between borrower and lende r . 9
2)
Insured loans--where the loan is originated, made,
and service by the FrnHA.
The insured notes are then
sold to investors in the private sector.
Interest
rates are either established by statute or by a procedure set forth in the regulations. 10
Further, FrnHA loans can be categorized by purpose into
13 general areas:
1)
Operating loans--Available for equipment, livestock,
feed, seed, fertilizer, and forestry.ll
2)
Youth Project loans--Available to individual rural
residents under 21 years old. 12
3)
Emergency loans--Available when funds are needed as a
result of a natural disaster. 13
4)
Farm Ownership loans--Available to single family farm
operators
for the purposes of constucting or repair-
-5ing farm houses and other buildings; improve land;
develop water, forestry, and fish farming resources;
establish recreational and other nonfarm enterprises
to supplement farm income; and refinance existing
debts. 14
5)
Soil . and Water Conservation loans--Available to
individuals, partnerships, and corporations for purposes
of conserving natural resources. 15
6)
Recreational loans--Available to establish incomeproducing recreational facilities. 16
?)
Loans to Indian Tribes--For farm related purposes. l ?
8)
Loans to Associations--Usually of farmers for purposes such as community irrigation and soil conserv"
18
a t 10n.
Rural Housing loans--Available for buying or repairing
farm homes. 19
10)
11)
.
Watershed Protection and Flood Prevention loans
Resource Conservation and Development loans 2l
20
12)
Community Facility loans--Available to public associations for water and waste disposal systems. 22
I)
Rural Industrialization loans--Available to either
individuals or communities to stimulate economic and
environmental climates in rural areas~2)
As mentioned earlier in this paper, credit from the FmHA
is generally more desirable to the farmer-rancher than would
be conventional-type financing even if it were available.
For
instance, the interest rates charged by the FmHA are somewhat
lower than those charged by conventional sources.
The FmHA
-6-
interest rates vary from program to program; some are set by
statute and others are periodically determined. 24 However,
a typical rate for many FmHA programs is in the neighborhood
of
5% to 6%, whereas conventional financing rates vary from
7% to 10%.
The pay-out period for the loans in most of the
agency's programs is also very attractive.
When an individual desires an FmHA loan, and feels he
might qualify, his first step is to contact his local FmHA
office.
If there is not an office in his county, he can
usually find one within not too great a distance.
offices in 42 states.)
(There are
Normally, the individual will deal
exclusively with his local office.
The FmHA employs state supervisors, district supervisors,
and county supervisors; however, most public contact is through
field representatives.
Usually, after an individual has
contacted his local office, a conference will be set up to
determine the applicant's needs, his potential to repay, and
any available security for the loan.
Also, it will be deter-
mined whether or not the individual has sufficiently exhausted
any possibilities of obtaining conventional credit.
Since most FmHA loans are made to help individuals attain specific objectives, each borrower will be provided the
supervision necessary (apparently whether he wants it or not)
to achieve those objectives and to protect the financial
interest of the government. 25
This FmHA supervision consists of assistance in long-
-?-
range planning of the agri-operation, supplemental annual
planning, help in record keeping, and periodic supervisory
visits to the farm by FmHA personnel.:?6
In turn, an individual who acquires assistance from the
FmHA will be expected to, among other things:
1)
Realize the difference between FmHA financing and
conventional financing, and be aware of the characteristics peculiar to FmHA financing.:?'?
2)
Participate in the supervisory planning activities
Wl'th th e FmHA repreen t a t'lve. 28
practic~s
J)
Initiate and carry out the key
with the FmHA. 29
agreed upon
4)
Maintain suitable records. JO
5)
Make payments on the loan within the terms of the
agreement and ability to do so.Jl
6)
Maintain and properly account for property pledged as
security for the 10an. J2
The FmHA will normally send out timely notices of payments
due, etc.
However, if the borrower fails to make his payments,
or otherwise fails to meet the requirements set out above, which
he has agreed to, it is generally specified in the loan agreement between the two parties, that a default has occurred.
A
default in an FmHA loan is essentially similar 40 a default in
a conventional-type loan, except that in the former, borrower's
rights and creditor's remedies are codified into federal statute.
-8-
The government, by virtue of the statute, and usually by
the loan agreement itself, will have the power upon default,
to accelerate the payments due,33 and subsequently liquidate
the security.3 4 However, the Government, like most wise
conventional lenders, has realized that the above procedure
does not always return top dollar.
Therefore, it is FmHA
policy to make every effort to give the borrower a reasonable
opportunity to make late payments, etc., if there is a reasonable likelihood of future timely payments.
The
FmB~
also
has a provision for extension and renewal of credit as well
as additions to existing credit.
It appears that agency supervision of FmHA loans is
continually growing, and it sometimes becomes a matter of
question to the farmer-rancher whether the attractive terms
of FmHA credit are worth the massive red-tape and government
supervision involved.
There are those who would argue that the federal government should not engage in the loan business at all.
And
it could be further argued that the FmHA is just another way
that the federal government has fashioned to gain greater
control Qverthe nation's agricultural industry.
However,
at least one circuit court of appeals 35 has specifically
upheld
the . ~A
program as being a legitimate exercise of
Constitutional powers, and several other circuits have so
implied the same. 36
-9-
Since the basic operation of FmHA loans is similar
to that of conventional loans, many of the legal problems
associated with FmHA loans are similar to those connected
with conventional credit.
One frequent area of litigation
is where there has been a default by th borrower.
However,
the most common and interesting source of controversy is
where the lender's security interest has been impaired or
converted.
Probably, the primary concern of the federal courts over
FmHA-related controversies has been whether to apply state
or federal sUbstantive law.
Most cases~7
including decis-
ions from the . third, fifth, sixth, ninth, and tenth circuits,
have held that federal law should prevail. 38
In United States v. Sommerville, a 1963 Pennsylvania case,
the U.S. sued the defendant auctioneer for conversion, to
recover the value of livestock, covered by a recorded FmHA
security interest, and sold by the auctioneer as agent for
the borrower. 39 Relying on remotely similar fact situations
S upreme Cour t d eC1Sl0ns,40
ln several O
prl0r
o
0
held that federal law should apply.
0
th e thOlr dClrCUl
'
°t
The court commented:
"An independent federal rule of decision must be applied when
a genuine federal interest would be subjected to uncertainty
by application of disparate state rules.,,41
Thus, the court adopted the so-called "Clearfield Trust"
(Clearfield Trust v. United States 42 ) Theory whereby a
-10-
federal court will fashion a federal common law if it deems
such necessary (i.e. where the rights and duties of the federal government would be in danger of exceptional uncertainty.
Occaisiona11y, under the "Clearfield Trust" rule, a federal
court will necessarily adopt a particular state law as
being the applicable federal law in
a given situation.
But,
the Sommerville decision rejects this, and says that the
federal law concerning FmHA loans should be promulgated
exclusively by the federal courts, and be absolutely uniform.
The Sommerville court concluded:
"The administration
of the loan program would be undermined and its power to
protect its purse limited if disparate laws of individual
states were applied to substantially identical loan transactions.
Such transactions would be subject to diverse legal
effects.
The FmHA would have to frame its loan program to
suit the policies of particular states as evidenced by their
respective laws.
The U.S., as a party-plaintiff, would be
able to protect ise1f from financial loss in one state, but
not in another.
Protection of the purse is paramount here,
and is paramount1y federal.
vVhe~her
the U.S. can maintain a
suit on an FmHA loan must depend orr uniform federal polio
Cles.
43
So, in Sommerville, while the U.S. would not have prevail-
ed under the laws of the forum state, Pennsylvania, it was
v ictorious after "federal law,"
third circuit-style, had
-11-
been applied.
A later case, Cassidy Commission Company v. United
States,44 involved an action by the U.S. against a livestock
commission company for wrongful conversion after several
cattle, upon which the U.S. government, through the FrnHA,
held a chattel mortgage security interest, were sold.
The
tenth circuit also adopted the "Clearfield Trust" rule,
and commented that it was the duty of the federal courts
to fashion a federal rule concerning the rights of the
U.S. under such security agreements.
Another case, United States v. Hext,45 a 1971 Texas
case, likewise held that rights and liabilities arising out
of FmHA loan transactions must be determined with reference
to federal law, to be fashioned by federal courts according
to the general principles of commercial law. 46
In Hext, the FrnHA loaned Hext, a cotton farmer, some
$)8,000 to finance his farming operations for the year 1962.
In order to provide security for the loan, Hext granted a
chattel mortgage on his expected cotton crop to the FrnHA.
The mortgage was duly recorded in compliance with Texas law.
After the cotton crop was harvested, it was ginned, processed,
baled, and store in a warehouse, for which, in return, a
negotiable bill was issued to Hext.
through a broker.
Hext then sold the cotton
Neither the warehouseman, broker, or ult-
imate buyer had any knowledge of the government's security
-l?-
interest.
The government filed suit against the warehouse-
man and the broker for conversion.
Once the fifth eircuit had decided to apply federal law,
it was then faced with the onerous question of.
federal law?
Said the court
to • • •
What is the
(W)e see no reason nor
necessity for fashioning a specialized, esoteric body of federal law, confined in terms of suits by the U.S. seeking to
impose conversion liability on persons who deal with property
mortgaged under the FmHA program.
An FmHA loan is nothing
more nor less than a secured transaction, with the U.S. as
the secured party holding a security interest in the
~ro~­
erty of the dettor in order to assure repayment of the subject
loan. ,,47
Resolving the question as to what is the appropriate
federal law, the court reasoned.
"We perceive no reason why
the rights of the U.S. arising out of secured transactions
pursuant to the FmHA loan program should be any different
than those of any other financing operations under the Uniform
Commercial Code.
We have thereforedetermined that in fash-
ioning the federal law that is applicable to suits arising
from the FmHA loan program, we ahall ge gUided by· the
principles set forth in Article 9 and other relevant portions
of the UCC. ,,48
Incidentally, the Hext court ultimately decided that the
warehouseman and broker were not liable to the U.S. for
-13-
conversion by virtue of UCC 9-307(1).
Although the Hext decision was one of the first to apply
UCC principles to security for FmHA loas, this rationale of
fashioning federal law was, by no means, new.
In 1950,
Judge Learned Hand and his Second Circuit looked to the
Negotiable Instruments Act to decide a case arising from a
Reconstruction Finance Corporation program. 49
This rationale of paterning federal law after a widelyaccepted coded law such as the UCC appears much more logical
than did the previous procedure whereby each circuit fashioned
its own set of "federal laws."
Under the new rationale, not
only is much of the confu.sion avoided by the uniformity, but
there is a greater sense of fair play, in having some idea
of what_the law is going to be before you go into court.
It should be mentioned at this point that most of the
cases where the U.S. sues for conversion of a security interest
arise out of circumstances where the farmer-rancher needs
cash to make a payment on his FmHA loan.
The farmer-rancher,
without any fraudulent intentions, forgets about or is unaware of the security interest, and sells the property covered
by the security interest.
The solution to this problem is
simply for the FmHA county supervisors to keep the farmerrancher continually aware of what property (e.g. afteracquired property) is covered by the government's security
interest.
Also, the farmer-rancher should be advised of the
-14-
specific obligations created by such a security interest.
The Regulations now make it illegal for the FmHA not
to disclose all pertinent information.
In fact, if the field
representative negligently fails to so advise the farmer of
his rights and obligations attendant to the loan, the field
representative can be held personally accountable and liable
for any financial loss suffered by the government as a result
of his negligence. 50
Another reason that problems regarding the impairment
or conversion of security could easily be avoided, is that
the FrnHA is empowered to give partial or complete releases
of the security for purposes ofl
1)
Selling the secured property for cash for the purpose
of making a payment on
2)
t~e
FrnHA loan, or
Converting the secured property to another item more
suitable for the borrower's needs.
(Example:
can trade in his combine for a tractor.)
A farmer
51
Hopefully, this paper has outlined some of the workings
of the FmHA program.
Any specific information regarding the
and its programs can be found either in the U.S.C.A. or
in the Federal Regulations. 52
FmI~
One question that arises is:
the FrnHA to the practicing lawyer?
~~at
is the relevance of
Well, a lawyer who is
practicing in an agriculturally-oriented area,will likely
have several farmer-ranchers as clients.
It is probable that
-15such a lawyer will at some time be confronted with the prohlem of helping a farmer-rancher work out the technicalities
of financing some facet of his operation.
It is important
that the lawyer know of the existence of FmHA programs as
an alternative to conventional financing, and also be aware
of themany pitfalls, woven into the FmHA laws and regulations,
facing the farmer-rancher who elects the FmHA route.
CITATIONS
1.
7 U.S . C. A. ~ 1941.
2.
U.S.D.A. Program Aid No. 973 (Revised 1975).
3.
Id.
4.
U.S. Government Manual, p. 100.
5.
7 U.S.C.A. ~ 1921.
6.
42 U.S.C.A. ~ 1471.
7.
U.S. Government Manual, p.100.
8.
U.S.D.A. Program Aid No. 973 (Revised 1975).
9.
Id.
10.
Id.
11.
7 C.F.R. 1800.1 (1975).
12.
Id.
13.
Id.
14.
Id.
15.
Id.
16.
Id.
17.
Id.
18.
Id.
19.
Id.
20.
Id.
21.
Id.
22.
Id.
23.
Id .
.24>.
U.S. Government Manual, p. 100.
25.
7 C.F.R. 1802.2 (1975).
26.
7 C.F.R. 1802.3 (1975).
27.
7 C.F.R . 1802.4 (1975).
28 .
Id.
29.
Id.
30.
Id.
31.
Id.
32.
Id.
33.
7 C.F.R. 1821.25 (1975).
34.
7 C.F.R. 1871.21 (1975).
35.
Cassidy v. U.S., 387 F.2d 875 (lOth Cir. 1967).
36.
U.S. v. Hext, 444 F.2d 804 (5th Cir. 1971).
37.
Hext, at 805.
38.
See 385 F.Supp. 318.
39.
324 F.2d 712.
40.
324 F.2d 712.
41.
Id.
42.
318
43.
324 F.2d 712.
44.
387 F.2d 874.
45.
444 F.2d 804.
46.
Id.
47.
Id.
48.
Id.
49.
180 F.2d 241 .
50.
7 C.F.R. 1871.3 (1975).
u.s.
363.
51.
6 C.F.R. 371.5 (1975).
52.
7 U.S.C.A. 1921, et.
~.,
7 C.F.R. 1800, et.seg.