Helping institutions navigate the unique landscape of the Farm Credit System
July 24, 2020
The Farm Credit system has a unique history, complex regulatory requirements, and a vital place in our nation’s economy. Nexsen Pruet lawyers have decades of experience helping Farm Credit institutions structure lending deals and providing advice on standards of conduct, board governance, employment matters, fraud investigations, Borrower Rights, and criminal referrals to name just a few areas.
We’ve developed a series of practical videos to help Farm Credit institutions and their employees better understand and navigate some of these areas. Stay tuned as additional videos will be posted on a regular basis.
We stand ready to help. Contact Christy Myatt at 366-387-5124 for more information.
- Farm Credit Boards of Directors – Who They Are, How They Are Comprised, and What They Do
- How and When to File a DLR Notice
- Is an Estate Entitled to Borrower Rights?
- Notice of Adverse Credit Decisions and CRC Review
- Right of First Refusal and When it Applies
- Impact of Chapter 12 Bankruptcy on Loans to Farmers
- Patronage Distributions When the Borrower is in Bankruptcy
- Why You Need a Reaffirmation Agreement in a Chapter 7 Bankruptcy Case
- What is PACA and How Does it Impact the Rights of Lenders?
- What Happens if a Creditor Receives Preference Demand in a Bankruptcy Case?
- Fraud Prevention and Detection
- Internal Investigations: Immediate Steps for Farm Credit Institutions
- Criminal Referrals Under the Farm Credit Act
- Hiring Best Practices for Farm Credit Institutions
- Protecting Your Customer Base: Non-Solicitations
- When should I get a spouse to sign a guaranty
Farm Credit Tips
Farm Credit System is distinguished from other financial institutions in a lot of ways. Let me talk with you a little about their history. The System was created in 1917 when Congress enacted a law which was the original version of the Farm Credit Act. The reason for the creation of the Farm Credit System was that then, as now, traditional sources of capital were not always available for agriculture. The overarching principle of Congress was to create a system throughout the United States to be dedicated to the support of agriculture through good and bad times.
Company leadership may learn of potential wrongdoing in a variety of different ways – audits, employee surveys, employee or customer tips, or accounting reconciliations, to name a few. The way a company responds in the hours and days following discovery of suspected wrongdoing can be key to limiting exposure and preserving the integrity of your organization’s internal investigation.
A member’s bankruptcy should have an effect on the member’s right to receive a patronage refund, but the precise effect depends on variables in each case. Let’s examine a few of those variables. The first question to ask is whether the member who is in bankruptcy is eligible for a patronage refund. Look at what your association’s by-laws and policies say about patronage eligibility. For example, some associations exclude borrowers from patronage eligibility if they have an accelerated loan, a loan in default or non-accrual and past-due at year-end; or if any portion of their debt to the association has been charged-off in the past seven years; or if the member waived patronage rights in consideration for a forbearance or restructure agreement with the association. These types of eligibility rules often apply to a member who is in bankruptcy.
Important steps you can take toward deterring and intercepting fraud. 1. Develop internal controls that will deter and detect fraud. 2. Train your managers and staff to exercise professional skepticism and identify suspicious activity. 3. Leadership must set a company-wide tone at the top. 4. Set up a reporting structure that facilitates tips to the board and executive management of suspicious activity.
A distressed loan restructuring notice is commonly referred to as a DLR notice. Once a loan has been found by an Association to be distressed, the Farm Credit Act requires that the borrower be provided with a DLR notice.
A primary goal of the federal Bankruptcy Code is to promote a fair distribution of the debtor’s assets among creditors. One way the Code does this is by giving the debtor or bankruptcy trustee the power to take or claw back payments the debtor made to so-called preferred creditors before the bankruptcy petition date, and redistribute those funds to the larger pool of creditors according to the Bankruptcy Code’s payment priority structure. Generally speaking, a creditor who receives a greater payment than other creditors in the same priority class must disgorge the payment so all similarly situated creditors can share the funds equally or on a pro rata basis.
Is an estate entitled to Borrower Rights under the Farm Credit Act? The easy answer is NO. Borrower Rights are only available to the borrower. If the borrower dies, then Borrower Rights no longer apply and the estate of the borrower cannot exercise such rights to restructure a distressed loan.
Title insurance is crucial for the smooth operation of our real estate markets and by extension, our economy. It is also very important for lenders. The premium a lender will pay just once for a policy reduces the risk of incurring a loss that exceeds the value created from the land transaction. Additionally, the loan policy has value for the lender because it essentially transfers the costs of handling title defects to an entity that specializes in title issues and insurance. For this reason, you should always purchase a policy, and always consider tendering a claim for any perceived defect.
Criminal referrals under the Farm Credit Act - Unfortunately, criminal activity is becoming more rampant in the lending arena. It may involve employees, borrowers or third parties. It can also involve wires and hacking which seems to be more prevalent lately.
Every lending institution is dependent on maintaining and growing a reliable customer base. You invest significant resources in motivating and rewarding your lending staff to identify borrowers and retain their business. Your lenders form relationships with borrowers in achieving this goal. So how do you protect these valuable assets when an employee with these relationships leaves your organization for a competitor?
The U.S. Perishable Agricultural Commodities Act of 1930, known as PACA, regulates trading in perishable agricultural commodities such as fruits and vegetables. The PACA statute provides that upon delivery of perishable agricultural products to the purchaser, a constructive statutory trust automatically arises for the benefit of the unpaid seller or supplier. The purchaser holds the agricultural products and all sale proceeds from those products in trust until the seller is paid in full.
Farm Credit Institutions, like other employers – depend on their employees. You can have a savvy senior management team and impressive business plans, but you need to hire the best employees to help achieve your mission. Conversely, poor hires can create big headaches and expose the association to significant liability.
Chapter 12 of the US Bankruptcy Code was enacted in response to the farm crisis in the 1980s. It provides qualifying family farmers with a more streamlined and less expensive way to reorganize their finances than in a Chapter 11 bankruptcy case. If you are familiar with how Chapter 13 bankruptcy cases work, then you’ll see that Chapter 12 has many similarities.
The federal Equal Credit Opportunity Act, called ECOA for short, was enacted in the 1970s and is implemented by Regulation B. ECOA promotes fair lending practices by prohibiting creditors from discriminating in any aspect of a credit transaction on the basis of martial status or other personal characteristics including sex, race, age and national origin.
It is the right of a previous owner of the property, to be offered the first opportunity to lease or purchase the agricultural real estate, that a Farm Credit Assoc.acquires through foreclosure, bankruptcy, or voluntary conveyance such as deed in lieu or surrender agreement. ROFR applies only to agricultural loans.
An “adverse credit decision” is a credit decision where a Farm Credit Association decides not to make a loan to an applicant; approves a loan in an amount less than the applicant requested; or denies a DLR restructuring application. If there is an adverse credit decision, notice should be sent as quickly as possible, in writing, to all primary applicants or borrowers.