A House Agriculture subcommittee approved legislation Wednesday that would let the Department of Agriculture guarantee loans made to farmers with past credit troubles.

The voice vote by the forestry, resource conservation, and research subcommittee moves the bill to the Agriculture Committee. The legislation, which would give community banks some backing for loans to farmers who otherwise would probably be denied credit, is expected to reach the House floor late this summer.

Supporters said the legislation corrects an unfair limitation imposed on lending to farmers in 1996.

The department, through its Farm Service Agency, assists farms both through direct lending and by guaranteeing up to 90% of loans made by banks and other lenders. However, under the 1996 Omnibus Farm Law, any farmer who once defaulted on a loan became ineligible for further government-backed funding.

That squeezed many farmers who had been advised to seek debt relief during the 1980s farm crisis.

During the 1980s, "producers were allowed-and in many cases encouraged- to take writedowns with the understanding that if they got their financial house in order, they could be eligible for future loans," said Rep. Larry Combest, R-Tex., the bill's sponsor.

"In the 1996 farm bill, this policy was changed and farmers were told that ... regardless of their ability to repay, the USDA cannot provide further loans."

The legislation voted on Wednesday would qualify farmers who got debt relief before April 4, 1996, for guaranteed bank loans. But it would continue to bar direct lending from the USDA.

Legislators are counting on banks to determine which farmers are worthy of government-backed funding. "We sustain more losses in direct lending than in guaranteeing loans made by private sources," said Rep. Saxby Chambliss, R-Ga. "Banks do the best job determining creditworthiness. They are the ones in the money lending business."

Mark K. Scanlan, agriculture lobbyist at the Independent Bankers Association of America, said that even if the bill becomes law, banks will be cautious when lending to people with troubled histories.

"The question for the bank remains: 'Are these going to be good credits?'" he said.

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