Constructive Credit

For more than 106 years, Farm Credit Midsouth employees have prided themselves on providing “value added” services. Fortunately, most Farm Credit team members grew up in or around a rural or farming environment, which truly enables our staff to speak the language of our customer base. While other lenders may provide only convenience, Farm Credit Midsouth understands the needs of our customers and strives to provide both convenience and constructive credit. “Constructive credit” refers to borrowing money that can ultimately enhance one’s wealth, or life, in a meaningful way. By the same token, unconstructive credit doesn’t always enhance a person’s life and can even be detrimental to the business and operation.

My 25+-year career with Farm Credit has taught me that liberal, overly convenient credit is not always a win for everyone, especially the borrower. Early in my career, I recall a commercial banker structuring a loan for a customer to finance steers over five years with monthly payments. Unfortunately, the banker had no experience making loans on cattle, much less steers, and the relationship was horrible for both the bank and the customer. In today’s lending environment, we are constantly seeing other lenders attempt to enter the agricultural lending arena and advertise lending options, such as “interest-only” financing, and promising “little or no money down.” While an interest-only option and no money down may work for some, it is not always the best option, especially for someone attempting to build a net worth. Interest-only means you are not paying down your principal debt.

Part of our mission at Farm Credit Midsouth is to provide specialized expertise and value-added service. Our vision also provides that our Association is effectively managed, sufficiently capitalized, and provides the most dependable source of capital. To accomplish our Association’s vision as managers, we must make prudent, constructive lending decisions that are win-wins for both the Association and the stockholder. In many cases, making an independent management decision without emotion creates issues, especially when other lenders are willing to make decisions that do not benefit the customer.

The first real estate loan I personally obtained included a loan to purchase 50 acres of farmland. My lender was a commercial banker who advocated amortizing my loan for 30 years, while providing one-year renewals on a variable rate of interest. I recall requesting the term to be over ten years with a goal to pay the loan off in five. The structure proposed by the commercial banker allowed the bank to charge me an annual renewal fee, change the variable rate of interest as needed, and re-amortize the loan annually for successive terms of 30 years. The options appeared very convenient, but were they really that constructive for me? Thankfully, I did not follow the commercial banker’s advice, as I would most likely still be in debt.

The first real estate loan I personally obtained included a loan to purchase 50 acres of farmland. My lender was a commercial banker who advocated amortizing my loan for 30 years, while providing one-year renewals on a variable rate of interest. I recall requesting the term to be over ten years with a goal to pay the loan off in five. The structure proposed by the commercial banker allowed the bank to charge me an annual renewal fee, change the variable rate of interest as needed, and re-amortize the loan annually for successive terms of 30 years. The options appeared very convenient, but were they really that constructive for me? Thankfully, I did not follow the commercial banker’s advice, as I would most likely still be in debt.

Providing a value-added service requires our lenders to teach our customers about the importance of knowing your owner’s equity, debt load, down payment, terms of repayment and how interest rates play on payments. Often the salesperson is creating a payment with no long-term regard for what the asset will be worth in the future. So, in the above example, it is not unusual for the car salesperson to offer an interest rate at 8% or more on the vehicle and an amortization period of seven years or more. A $45,000 car purchased with 100% financing over a period of seven years at 8% interest, yields total payments of $701.38 per month. Multiplied by 84 months, that yields total payments of $58,916. Easy money financing isn’t always the best bet, because the car most likely isn’t going to be worth very much after seven years of payments.

A former mentor and manager of mine was often quoted as saying “If you give a borrower enough options, they will make a bad decision.” Our Association’s goal is to provide constructive credit and remain available to serve your financing needs now, as well as for future generations. You may remember in an earlier issue a colleague of mine penned a great article entitled “Cash is King.” While I very much agree with the article, I think we must remember that a customer’s net worth plays a huge role in making prudent financing decisions. Sometimes prudent management decisions require more answers than knowing just “how much a payment is.”

Our loan officers are lending professionals and not car salespeople. Convenience is our goal, but not at the cost of issuing unconstructive loans. One of the toughest challenges we have as a cooperative lender is providing reasonable credit while avoiding putting customers’ and Association assets at risk, thus the importance of the value-added service.

Ralph Stewart is Farm Credit Midsouth’s Executive Vice President and Chief Credit Officer. He guides our team in directing, managing, and monitoring risk within the laws and policies of regulatory authorities.