By: Danny Klinefelter
Yes, under specific circumstances a lender can demand repayment even if your loan service is current.
On term and intermediate loans, as well as mortgages, there is usually language in the note that allows a lender to call the note if the lender deems himself insecure. This usually happens when a borrower is highly leveraged and the value of his leveraged assets falls significantly. These assets can include equipment, livestock, or land. In economic downturns, these three asset classes often lose value which makes the loan less secure for the lender. Another way loans become less secure is when the borrower has been losing equity and liquidity for an extended period.
However, borrower’s rights laws passed in the 1980’s give borrowers the right to challenge a loan call if they can offer a viable restructuring plan. This may include qualifying for a Farm Service Agency (FSA) guarantee. However, FSA is less likely to help the lender avoid a loss situation than was the Farmers Home Administration (FHA), during the farm financial crisis of the 1980’s.
A loan that is current may also be called in the case of loan agreements with restrictive covenants. A borrower that violates the covenants is subject to a loan call unless he immediately rectifies the problem.
A lender may also deem himself insecure or under-secured due to a borrower’s misrepresentations or false statements (material dishonesty); death or insolvency; or credit or foreclosure proceedings by another lender or interested party. In most cases, laws require that default must be material to the borrower’s ability to repay the loan in question.
One example would be where a borrower is current with his primary lender, but acquires substantial debt and payables to other creditors (e.g., landlords and suppliers) which he is unable to pay. In the case of operating loans, a lender is most likely to refuse to renew or extend the borrower’s loan(s).
As previously stated, when a lender calls a loan that is current, restructuring is an option if the borrower has committed no fraud. However, calling a loan that is current carries public image and legal risks because the lender can only defend his actions in court. Conversely, borrowers can tell their version of the story to anyone who will listen—even if the lender had warned them repeatedly about the consequences of a deteriorating situation.
From a legal standpoint, lenders face also difficult decisions when the condition of their portfolio and the agricultural sector deteriorate significantly. Laws such as Dodd-Frank make them hesitant to be aggressive. In contrast, the Basel III Accord and financial regulators (both concerned about institutional soundness) can force lenders to be less flexible in working through problematic loans.
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