Farmers Home Administration's Emergency Loan Program for Production Losses

Farmers Home Administration's (FmHA) Emergency Loan Program for Production Losses was reviewed. A large increase in the volume of disaster assistance loans in fiscal year 1978 prompted congressional interest in examining and amending the programs under which such loans were made. FmHA production loss loans are made to farmers, ranchers, and aquaculture operators who have suffered a severe crop loss as a result of a natural disaster in the areas designated as disasters by the President or the Secretary of Agriculture. The 1978 loans were made at a subsidized interest rate, with the rates to the borrower ranging from 3 to 5 percent, while FmHA paid 8.3 percent to borrow the loan money. Sample production loss loan files from fiscal year 1978 in five states with high loan activity were examined to determine: (1) the financial status of the borrowers, (2) the average loan size and term, (3) how the loan proceeds were used, and (4) the extent to which the borrowers could have secured credit elsewhere. The average borrower had a net worth of $180,000, a gross annual income of $100,000, and a farm of about 750 acres. The average loan was about $55,000 and repayable over an 8 year period. There was little or no assurance that the loans were used for disaster-related purposes, particularly by the wealthier borrowers. Two problems that GAO had identified in an earlier report on the production loss loan program still existed. First, the FmHA loss eligibility criteria was unfair to farmers. Earlier it was demonstrated that small differences in gross income and variations in cash crop diversity among farmers could unfairly determine eligibility for production loss loans. Recommendations were made to FmHA at that time which, if implemented, would have eliminated remaining inequities. It is recommended that Congress strengthen the eligibility criteria in the manner described by GAO. The second lingering problem is that many loans apparently are made to borrowers who could get credit elsewhere at reasonable rates and terms because the FmHA "credit elsewhere" test was inconsistently enforced. Correction of these problems would confine federal lending to those borrowers most in need, prevent FmHA from competing with the private sector, and reduce the number of low interest loans made. GAO also provided a list of examples of FmHA borrowers who it believed could have obtained credit elsewhere at reasonable rates and terms.