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Agricultural Loan Underwriting. Comptroller of the Currency Agricultural Lending Handbook December 1998. Agricultural lending involves some unique requirements, however, the same fundamental underwriting practices as other forms of commercial lending apply.

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Agricultural loan underwriting l.jpg

Agricultural Loan Underwriting

Comptroller of the Currency

Agricultural Lending Handbook

December 1998


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  • Agricultural lending involves some unique requirements, however, the same fundamental underwriting practices as other forms of commercial lending apply.

  • The underwriting process, and subsequent loan administration should be governed by an effective set of lending guidelines.


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What do we mean by “underwriting standards?” however, the same fundamental underwriting practices as other forms of commercial lending apply.

  • The term “underwriting standards,” refers to requirements, such as ones related to collateral, loan maturities, pricing, and covenants, that banks establish when originating and structuring loans.


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The Comptroller’s Handbook lists the following minimum underwriting guidelines for agricultural lending.

  • In-depth financial analysis

  • Structuring loans in accordance with the type of borrowing and the expected income stream

  • Reliable collateral evaluations and margins, and/or other steps to minimize credit risk


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Financial Analysis segregation of any prior period crop carryover debt

  • Quality of financial information for agricultural operations varies significantly

  • In general, many small farm operations use cash-basis tax returns and market-value financial statements that are self prepared and unaudited


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Key Elements of Reviewing Financial Information segregation of any prior period crop carryover debt

  • Review the reasonableness of budget assumptions and projections

  • Compare projections with actual results

  • Assess working capital adequacy

  • Analyze net worth changes

  • Assess the impact of capital expenses

  • Evaluate any supplementary sources of income


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Loan Structure segregation of any prior period crop carryover debt

  • It is important to structure loans based on the purpose for which the loan is made

  • Short-term loans

  • Long-term loans

  • Carry-over debt


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Short-Term Loans segregation of any prior period crop carryover debt

  • Most often short-term loans are made for production inputs

  • Short-term loans are self-liquidating at the end of the production cycle from the proceeds from product sales


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Long-Term Loans segregation of any prior period crop carryover debt

  • Commonly referred to as “term” loans

  • Primarily associated with the purchase of capital assets, such as machinery and equipment, real estate, breeding herds and orchards

  • The primary source of repayment is from cash flows from operations

  • Collateral is viewed only as a contingent secondary repayment source


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Carry-Over Debt segregation of any prior period crop carryover debt

  • Refers to restructured short-term debt, such as the unpaid portion of an annual operating line of credit, resulting from the borrower’s inability to liquidate the debt as originally planned


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Collateral Valuation and Documentation segregation of any prior period crop carryover debt

  • Collateral may be defined as property pledged as security for a loan or other obligation

  • The pledge of collateral adds safety to the loan, since the lender may sell the pledged property to obtain payment if the debtor fails to pay.


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Collateral Evaluation requirements should be met:

  • Current values of all collateral should be established when the loan is made

  • Periodic re-evaluation of value should be practiced, with the frequency of re-evaluation depending on the price volatility of the assets


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Lien Perfection requirements should be met:

  • A lien is a charge upon property for the purpose of securing the payment or discharge of a debt or obligation

  • The method of obtaining and perfecting a security interest depends on the type of collateral

    • Chattel

    • Real Property (Real Estate)


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Chattel Lien livestock, crops and equipment

  • A chattel lien is established under the Uniform Commercial Code (UCC)

  • The UCC is a set of guidelines adopted by 49 of the 50 states

  • In Texas, UCC filings are made with the Secretary of State’s office and are generally referred to as UCC-1 filings.

  • The description of property secured under a UCC-1 must be reasonably specific, and current (meaning that they periodically expire and must be refiled)


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Real Property livestock, crops and equipment

  • In Texas, the security interest in real property (real estate) is established through a Deed of Trust

  • A Deed of Trust is a three party document - the lender, borrower and trustee

  • The Deed of Trust is filed with the County Clerk in the county in which the real property is located, and is in effect until a release is executed by the lender and filed.


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Credit Risk Management livestock, crops and equipment

  • Many lenders require protective covenants and other affirmative undertakings by the borrower as part of the loan underwriting process

  • A loan covenant is a condition that the borrower must comply with in order to adhere to the terms in the loan agreement

  • If the borrower does not act in accordance with the covenants, the loan can be considered in default and the lender has the right to demand payment (usually in full)


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Why do banks add covenants to the loan agreements? livestock, crops and equipment

  • Banks usually add covenants in order to accomplish the following objectives:

    • Maintain loan quality

    • Keep adequate cash flow

    • Preserve equity

    • In a borrower with a known weakness in its capital structure as a measure to improve this weakness

    • Keep an updated picture of the borrower’s financial performance and condition


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  • Covenants may related to: livestock, crops and equipment

    • A requirement to purchase insurance – hazarded or crop insurance

    • Contracting

    • Hedging

    • Compensating checking account balances

    • Requirement to provide financial information


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Loan Monitoring livestock, crops and equipment

  • Ongoing monitoring is a critically important component of the lending process

  • Collateral inspections and re-appraisals/ valuations should be performed on a regular basis by qualified personnel

  • A periodic review of loan documentation is important to ensure that up-to-date financial information, security agreements and UCC filings, and credit reports are maintained in the borrowers file


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