New Loans for the Hemp Industry

On April 16, 2020, the U.S. Department of Agriculture (USDA) Farm Service Agency (FSA) released new loan guidance for lenders servicing hemp producers under FLP-816, providing guidance on servicing direct and guaranteed loans for industrial hemp and parameters producers need to follow to be eligible for the FSA loans.

Starting with the 2020 crop year, FSA will consider applications to grow hemp beyond the provisions of the 2014 pilot program. For eligibility producers must provide a copy of either their USDA license or a license provided under an approved State or Tribal plan under the 2018 Farm Bill. A copy of the borrower’s current license is required. Individuals who are approved to produce hemp under provisions of the 2014 Farm Bill will continue to be eligible for FSA loan servicing assistance until the 2014 Farm Bills expiration: October 30, 2020.

Both direct loans and guaranteed loans require a purchase contract to show lenders the applicant has financial resources to repay the loan.

These contracts will:

  • Provide for contract termination based on objective “for cause” criteria;
  • Require the grower be notified of specific reasons for cancellation;
  • Assure the producer’s opportunity to generate enough income to develop a cash flow budget and repay the loan; and
  • Be issued by a purchaser that has a reasonable and realistic prospect of fulfilling the contract, including a valid hemp license and a history of satisfying similar contracts.

If a hemp grower is properly licensed and shows they can provide cash flow without any hemp income in the projected plan, FSA and/or the guaranteed lender may consider servicing a loan without a hemp contract.

Loan Servicing Generally:

All planned hemp acreage must match the acreage reported to Farm Programs using form FSA-578. This information should also match what is reflected in the information provided with the corresponding license number.

The FSA will consider a borrower to be in non-monetary default if it is determined that the financed operation includes hemp that was not produced subject to a valid license; in such case losses related to hemp will not be covered under the guarantee (existing borrowers growing hemp without an individual USDA, State, or Tribal licenses are considered to be in non-monetary default.).

The FSA requires that income sources be dependable and likely to continue. FSA will review the prior production year contract and compare it with actual performance. Lenders must use the operation’s historical information as a guide. Producers will be required to assign their sale proceeds to FSA in an amount not to exceed their annual payment.

For Direct Loan Servicing:
  • Farm Business Plans must be based on standard production budgets. Business plans must reflect realistic performance assumptions that consider increased input costs by region; intended use of hemp produced; increased income for organic production; changes in unit numbers and weights; quality levels if production is for CBD; and other relevant facts affecting net income.
  • If the borrower’s delinquency or distress is the result of hemp being produced without a contract or the borrower used an unenforceable contract, the borrower would not meet the eligibility criteria.
  • The borrower may be eligible for primary loan servicing if other eligible commodities meet the eligibility criteria.
  • If a hemp crop is collected and/or destroyed according to license requirements, the borrower must provide FSA with a copy of the required lot-destruction documentation submitted to AMS.
  • A hemp operation’s license and registration cannot be transferred to another party, so if the borrower defaults on the loan, dies, or abandons the operation, no other legal individual, lender, or FSA Agency can official obtain the right to the commodity and attempt to liquidate it.
  • When conducting routine loan servicing actions that require a market value and income projections, hemp will be appraised and valued like all other production crops.
For Guaranteed Loan Servicing:
  • Applications must be reviewed by an Agency official. All planned hemp acreage will match reports previously filed with licensing information.
  • Lenders will continue to routinely service borrowers and monitor collateral.
  • Lenders will annually ensure all borrowers have the proper State, Tribal and/or Federal licensing and registration and have not had such certification revoked (without a valid license the borrower will be in violation of the Farm Bill and would be in non-monetary default).
  • When reviewing servicing options and creating future plans for a hemp operation, all lenders shall:
    • use as much of the operation’s historical information as possible for a general guide
    • review the previous production year’s contract
    • compare the contract with the operation’s actual performance
    • review the new contract (if applicable) to ensure the production is attainable and the borrower has the means of meeting any contract requirements.
  • Liquidation plans will be reviewed by Agency officials during routine lender reviews. It should be noted that all lenders shall ensure proper State, Tribal and Federal hemp guidelines are followed during the liquidation process, particularly regarding any disposal methods, if needed.

For more information about FSA loans, please visit https://www.farmers.gov/.

If you are a hemp producer and you have questions about FSA loans or state or USDA hemp production rules in general, please contact Navigate Law Group to schedule a consultation. 

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Trevor J. Cartales

Trevor J. Cartales

Senior Attorney

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Disclaimer

Every legal issue is very unique. Accordingly, the information in this blog is intended as general education material and not as legal advice. If you think you may have a legal issue you should consult an attorney.