Ag Loans

Authorizes the DOA to guarantee up to 90% on principal balance
and interest on loans made to farmers up to aggregate total of
$10 million.  Prohibits application to class "D" and "F" loans.
Requires lenders to remit insurance fees.  (HB978 SD1)

a                                                      AGR-1(99)
THE SENATE                              H.B. NO.           S.D. 1
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            

                   A  BILL  FOR  AN  ACT



 1      SECTION 1.  The legislature finds that the State's
 2 diversified agriculture is at a critical juncture.  Over the
 3 years, the State invested public funds for diversified
 4 agriculture research and development.  This investment is now
 5 coming to fruition.  With the closures of most of the State's
 6 sugar plantations, prime agricultural land, water, and an
 7 agriculturally oriented labor force are now available for
 8 agricultural development and expansion.  Financing is one of the
 9 critical elements required to foster diversified agriculture's
10 growth to further contribute to Hawaii's economy.  Agricultural
11 lending poses higher risks in comparison to conventional
12 commercial lending.  Unlike most other industries, agriculture is
13 not only susceptible to competition, increasing operating costs,
14 increasing government regulations, changing consumer preferences,
15 changing demographics, etc., but is also affected by adverse
16 weather conditions, insect and disease pests, urban encroachment,
17 etc.  These factors make agricultural lending a high-risk
18 proposition and private lenders base much of their lending
19 criteria on risks and benefits.

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Page 2                                                     978
                                     H.B. NO.           S.D. 1

 1      This Act encourages private lenders to provide financing for
 2 diversified agriculture by reducing private lenders' risks
 3 through the department of agriculture's loan guarantee.  This new
 4 program further encourages private lenders to provide financing
 5 by virtue of streamlined program procedures as there is no
 6 requirement for prior credit denials as is the case for
 7 department loans, generally, or for department insured loans.
 8      SECTION 2.  Chapter 155, Hawaii Revised Statutes, is amended
 9 by adding a new section to be appropriately designated and to
10 read as follows:
11      "155-    Loans guaranteed by the department.  (a)  The
12 department of agriculture may guarantee up to ninety per cent of
13 the principal balance of a loan, plus interest due thereon, made
14 to a qualified farmer or cooperative by a private lender;
15 provided that at no time shall the aggregate amount of the
16 State's liability, contingent or otherwise, on loans guaranteed
17 under this section, section 155-5, and section 155-6 exceed
18 $10,000,000.
19      (b)  Loans guaranteed under this section shall be limited by
20 the provisions of sections 155-9 through 155-12 for purposes of
21 class "A", "B", "C", and "E".  No class "D" and "F" loans shall
22 be made under this section.
23      (c)  Loans made under this section shall not be subject to

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Page 3                                                     978
                                     H.B. NO.           S.D. 1

 1 the restrictions in section 155-3.
 2      (d)  Interest charged on a guaranteed loan made under this
 3 section shall not be more than two percentage points above the
 4 prime rate charged by the lender.
 5      (e)  When the application for a guaranteed loan has been
 6 approved by the department, the department shall issue to the
 7 lender a guaranty for that percentage of the loan on which it
 8 guarantees payment of principal and interest.  The lender shall
 9 collect all payments from the borrower and otherwise service the
10 loan.
11      (f)  In return for the department's guaranty, the lender
12 shall remit a one-time insurance fee of two per cent on the
13 principal amount of the guaranteed portion of the loan, at the
14 time the loan is booked, except that for the following loans a
15 reduced fee of one per cent shall be paid:
16      (1)  Loans of $75,000 or less with a maturity exceeding
17           twelve months;
18      (2)  All guaranteed loans with a maturity of twelve months
19           or less.
20 This fee may be paid by the borrower as a cost for the loan.
21      (g)  When any installment of principal and interest has been
22 due for sixty days and has not been paid by the borrower, the
23 department shall issue, on request of the lender, a check for the

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Page 4                                                     978
                                     H.B. NO.           S.D. 1

 1 percentage of the overdue payment guaranteed, thereby acquiring a
 2 division of interest in the collateral pledged by the borrower in
 3 proportion to the amount of the payment.  The department shall be
 4 reimbursed for any amounts so paid plus interest at the
 5 applicable rate, where payment is collected from the borrower.
 6      (h)  Under conditions specified in department rules, the
 7 lender may request that a portion or all of the guaranteed
 8 percentage of the principal balance of the loan be converted to a
 9 participating share held by the department subject to section
10 155-6.
11      (i)  Should the lender deem that foreclosure proceedings are
12 necessary to collect moneys due from the borrower, it shall so
13 notify the department.  Within thirty days of the notification,
14 the department may elect to request an assignment of the loan on
15 payment in full to the lender of the principal balance and
16 interest due.  Foreclosure proceedings shall be held in abeyance
17 in the interim.
18      (j)  The lender may reduce the percentage of the principal
19 balance guaranteed under this section at any time."
20      SECTION 3.  New statutory material is underscored.
21      SECTION 4.  This Act shall take effect on July 1, 1999. 

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