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No
Adverse Effect: Future Loans and Future Loan Servicing for Prevailing
Class Members
A. Introduction
According
to the Consent Decree in the Pigford case, debt forgiveness
required by the Consent Decree will not "adversely affect" a
claimant's eligibility to participate in a USDA loan program or a USDA
loan servicing program. This Monitor Update is intended to explain how the
no adverse effect part of the Consent Decree works for claimants.
B. Two Types of USDA Debt Forgiveness - Consent Decree
and Non-Consent Decree
Many
claimants have had USDA debt forgiven, or they will have USDA debt
forgiven in the future. There are several different ways that a claimant
might receive debt forgiveness, and the difference can be important for
the future.
1.
Debt Relief Under Pigford
As
part of the Consent Decree, USDA must discharge many outstanding debts
owed by successful claimants. According to the Consent Decree, debts
that were incurred under, or affected by, a USDA program that was the
subject of the Adjudicator's or Arbitrator's finding of discrimination
on credit claims are to be forgiven. A Court Order explains the debt
forgiveness rules in more detail. In addition, if the Adjudicator or
Arbitrator finds discrimination regarding a particular loan, a claimant
is also entitled to discharge of any debt of that loan type incurred at
the time of the earliest event on which there is a finding of
discrimination through December 31, 1996.
Claimants
who have questions about what debts should be forgiven may call the
Monitor's toll-free number, 1-877-924-7483. Callers may also request Monitor
Update 10, which explains debt relief.
2. Other USDA Debt Forgiveness
The
Consent Decree is not the only way that claimants may have received debt
forgiveness from USDA. USDA regulations require debts to be forgiven
under certain conditions. In addition, a bankruptcy court can give
relief from a USDA debt. One way or another, many claimants have had
debt written off outside of the Consent Decree process.
3. Why the Difference Is Important - Future Dealings
With USDA
The
difference between Consent Decree debt forgiveness and other USDA debt
forgiveness is important. The Consent Decree says that debt
forgiven because of the Consent Decree shall not adversely affect the
eligibility of a claimant who wants to participate in a USDA loan
program or a USDA loan servicing program. Other forms of USDA debt
forgiveness can make a claimant not eligible for a USDA loan or for USDA
loan servicing. The following sections of this Update explain how the
difference in the type of debt forgiveness can affect a claimant.
C. Debt Forgiveness and Getting a USDA Loan
Debt
forgiveness can affect a borrower's right to a future USDA loan.
1. General Rule - Debt Forgiveness and Future USDA Loans
Applicants
who have had USDA debt forgiveness outside of the Consent Decree process
may be ineligible by law for a new USDA direct or guaranteed loan. Debt
forgiveness, for this purpose, includes the write-down or write-off of a
USDA debt. Although there are some exceptions to the rule, in general
the majority of applicants who received a write-down from USDA will
normally not be eligible for a future USDA loan.
2. Consent Decree Debt Forgiveness and Future USDA Loans
The
general rule is changed by the Consent Decree.
a. Debt Discharged Due to Consent Decree
A
debt discharged because of the Consent Decree will not hurt a
claimant's eligibility for another USDA loan.
Example:
Suppose
a claimant got a farm ownership loan in 1994. As a result of the
Adjudicator decision, USDA discharged the rest of the loan. This
discharge does not affect the claimant's eligibility for a new loan.
b. Debt Write-Down of Loan Later Forgiven Due to Consent
Decree
Many
claimants had loans that were written down or written off before the
Adjudicator's decision. According to USDA regulations, this would
often mean that the claimant would not be eligible for a new USDA
loan. If, however, discrimination was found in a loan that was
previously written down or written off, this earlier debt forgiveness
will not hurt the claimant's eligibility for another USDA loan.
Example:
Suppose
a claimant got an operating loan in 1990 and, due to payment
problems, USDA wrote off part of that debt in 1995. If the
Adjudicator found that there had been discrimination in the making
of the 1990 operating loan, the fact that the claimant had that
write-down in 1995 could not affect the claimant's eligibility for a
future USDA loan.
c. Subsequent Debt in Same Program Written Down and
Later Forgiven Due to Consent Decree
Many
claimants had loans that would have been forgiven under the Consent
Decree because the loan was in the same program as the loan that was
the subject of discrimination - but there is no debt left for the
claimant to pay because of a USDA write-down. This type of write-down
also cannot hurt the claimant's eligibility for another FSA loan.
Example:
Suppose
a claimant got an operating loan in 1991 and an operating loan in
1994. The 1991 loan had been paid in full, and the balance due on
the 1994 loan had been forgiven through FSA's debt write-down
process in 1998. If the Adjudicator found that there had been
discrimination in the making of the 1991 loan, the 1994 loan would
also have been forgiven under the Consent Decree - except that there
was no balance left on the 1994 loan. The write-down of the 1994
loan cannot affect the claimant's eligibility for a future USDA
loan.
D. Getting a Loan and USDA's Creditworthiness Test
Creditworthiness
can affect a borrower's right to a future USDA loan.
1. The General Rule - Creditworthiness and Future USDA
Loans
As
a general rule, an applicant must be creditworthy to be eligible for a
USDA loan. Credit history is taken into account when USDA considers the
creditworthiness of the applicant. Credit history includes the
applicant's past loan history with USDA. Therefore, if an applicant has
had difficulty making payment on USDA loans in the past, he or she might
not meet the USDA creditworthiness requirement for a future USDA loan.
2. Claimant Creditworthiness and Future USDA Loans
If
the claimant had an outstanding debt discharged by the Consent Decree,
in many cases the farmer will have missed payments on the debt and the
debt will have been delinquent. Under the USDA regulations, missing
payments on a USDA loan, being delinquent on a USDA loan, and so forth
could make the farmer ineligible for another loan.
a. Loan Affected by Discrimination and Future USDA Loan
Decisions
The
Consent Decree says that the forgiveness of debt because of the
Consent Decree shall not affect the claimant's eligibility for a new
loan. As a result, if a loan is forgiven because of the Consent
Decree, any problems the claimant may have had with that loan in the
past, such as missed payments or late payments, should not affect the
claimant's creditworthiness for the purpose of getting a new USDA
loan.
Example:
Suppose
a borrower received an operating loan in 1996 and became delinquent
on the loan in 2001. The Adjudicator found discrimination in the
making of the 1996 operating loan. The farmer's delinquency on the
loan cannot be considered a creditworthiness problem for the farmer
when USDA is considering making the claimant a new loan.
b. Subsequent Debt in Same Program Is Forgiven Due to
Consent Decree
The
same result is true for any debt that is forgiven because of the
Consent Decree.
Example:
Suppose
a claimant received two operating loans: one in 1994 and one in
1996, and both loans still had a balance. If the Adjudicator found
discrimination in the making of the 1994 loan, both loans would be
forgiven under the Consent Decree. USDA may not consider payment
problems for either loan as a factor in a decision about the making
of a new loan.
c. Subsequent Written Off Debt in Same Program Is
Forgiven Due to Consent Decree
Many
claimants had loans that would have been forgiven under the Consent
Decree because the loan was in the same program as the loan that was
the subject of discrimination - but there is no debt left for the
claimant to pay because of a USDA write-down. Payment problems for the
loan that is now forgiven cannot affect the creditworthiness of the
claimant.
Example:
Suppose
a claimant got two operating loans: one in 1994 and one in 1996. The
claimant paid the 1994 loan in full, but the agency wrote off the
1996 loan because the claimant had been unable make the payments on
that note. If the Adjudicator found discrimination in the making of
the 1994 loan, the 1996 loan would also be forgiven under the
Consent Decree - except that there is no balance left on the 1996
loan. Any payment problems the claimant had in the past on the 1996
loan would not affect the claimant's future creditworthiness if he
or she tried to get a new loan from USDA.
E. Eligibility for Future Loan Servicing
Farmers
who have borrowed from USDA sometimes have difficulty making loan
payments, or have other problems meeting the requirements of the loan. In
such cases, USDA is required to provide borrowers with the chance for what
USDA calls loan servicing. If the borrower is eligible, USDA loan
servicing can provide a number of ways to help the farmer stay on the
land. If the borrower meets certain criteria, the loan servicing can
include, for example, a reduced interest rate, a restructuring of the
loan, or other measures that help the borrower. The right to future loan
servicing - including future write-downs - is affected by past USDA loan
servicing.
1. General Rule - Debt Forgiveness and Future Loan
Servicing
The
eligibility rules for loan servicing take into account the borrower's
previous experience with USDA. For example, in general, USDA cannot
provide debt forgiveness to a borrower who had previous debt forgiveness
on another USDA direct loan.
2. Claimant Debt Forgiveness and Future Loan Servicing
a. Debt Discharged Because of Consent Decree
In
many cases, USDA cannot, by law, provide debt forgiveness to a
borrower who had previous debt forgiveness on another USDA direct or
guaranteed loan. USDA regulations contain some limited exceptions to
this rule, but for many people USDA rules will prevent a borrower with
debt forgiveness from getting certain kinds of loan servicing in the
future. A debt discharged under the Consent Decree, however, will not
hurt the claimant's eligibility for future USDA loan servicing.
Example:
Suppose
a claimant got a farm ownership loan in 1992, the Adjudicator found
that USDA had discriminated in making the loan, and, as a result of
the Adjudicator decision, USDA discharged the remainder of the loan.
This discharge does not affect the claimant's eligibility for loan
servicing in the future.
b. Debt Write-Down in Loan Affected by Discrimination,
Later Forgiven Due to Consent Decree
Many
claimants had loans that were written down or written off before the
Adjudicator's decision. According to USDA regulations, this would
normally mean that the claimant might not be eligible for future loan
servicing. If, however, discrimination was found in a loan that was
written down or written off before the Adjudicator's decision but
after the date of the discriminatory event, this debt forgiveness will
not hurt the claimant's eligibility for future loan servicing.
Example:
Suppose
a claimant got an operating loan in 1989 and, due to payment
problems, USDA wrote off part of that debt in 1991. If the
Adjudicator found that there had been discrimination in the making
of the 1989 operating loan, the fact that the claimant had a
write-down in 1991 should not affect the claimant's eligibility for
future USDA loan servicing.
c. Subsequent Debt in Same Program Had Debt Write-Down,
Later Forgiven Due to Consent Decree
Many
claimants had loans that would have been forgiven under the Consent
Decree because the loan was in the same program as the loan that was
the subject of discrimination - but there is no more left for the
claimant to pay because of a USDA write down. This write-down cannot
affect the claimant's right to future loan servicing.
Example:
Suppose
a claimant got an operating loan in 1991 and an operating loan in
1994. Suppose a balance remained on the 1991 loan, but nothing was
left to be paid on the 1994 loan because USDA forgave the loan in
1995. If the Adjudicator found that there had been discrimination in
the making of the 1991 loan, the 1994 loan would also have been
forgiven under the Consent Decree - except that there was no balance
left on the 1994 loan. The write-down of the 1994 loan would not
affect the claimant's right to future loan servicing.
F. Consent Decree Discharge Can Never Harm Claimant
This
Update provides a few examples of the no adverse effect rule found in the
Consent Decree. The rule may apply in other ways not illustrated by these
examples. The most important rule is that discharge of debt because of the
Consent Decree should never harm the claimant in his or her future
dealings with the USDA.
G. More Information
For
more information call the Monitor's office at 1-877-924-7483 or write to
the Monitor at P.O. Box 64511, St. Paul, MN 55164-0511.
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