Lessons learned from 22 years of debt mediation
The 22-year history of the Minnesota Farmer-Lender Mediation Program offers useful lessons about debt mediation that can be applied to our current foreclosure crisis.
Published May 1, 2009 | May 2009 issue
In the 1980s, farmers and their lenders faced a crisis of debt management and foreclosure that threatened the rural economy at its core. In its causes and symptoms, the farm loan crisis has many parallels to the mortgage crisis that hit in 2008. In the 1970s, agribusiness was a booming industry. Increased exports and favorable public policy generated high profits. As a result, land prices grew rapidly. Encouraged by the growing equity, lenders became generous with loans and debt-to-earnings ratios rose well above normal levels. In the 1980s, however, commodity prices dropped, weather-related crop disasters reduced production, and Farm Service Agencies began to see growing default rates—just as Fannie Mae and Freddie Mac did in 2007–2008.
The response to the crisis drove agribusiness further under. When lenders turned from equity lending to cash flow lending, the flow of credit was restricted, investment in agribusiness dropped sharply, and the entire rural economy felt the effects.
Seeking to end the paralysis, Congress passed the Agricultural Credit Act of 1987 to deal with foreclosures on agriculture-related loans. The act created a nationwide Farmer-Lender Mediation (FLM) Program that required federal agencies to help facilitate negotiations about credit problems.
Through the FLM Program, farmers and lenders have the opportunity to hold mediated discussions for the purpose of renegotiating, restructuring, or resolving farm debt. The program is administered and partially funded by the U.S. Department of Agriculture (USDA), which relies on a network of state-level FLM Programs to deliver mediation services. Currently, 35 states participate in the FLM Program, including the six Ninth District states of Michigan, Minnesota, Montana, North Dakota, South Dakota, and Wisconsin.
Though there are obvious differences between the farm lending and home mortgage industries, the 22-year history of the FLM Program offers useful lessons about debt mediation that can be applied to our current foreclosure crisis. This article describes the FLM Program in one Ninth District state—Minnesota—and shares lessons from Minnesota's FLM experience.
Mediation is the use of a trained, neutral facilitator—a mediator—to assist in the negotiations of parties in a dispute. Mediators use conflict resolution skills to facilitate effective negotiation. They may advise, counsel, and assist the parties on ways to come to agreement, but do not tell them how they should conduct their business or personal affairs. A mediator does not take sides or decide how the dispute should be resolved.
The mediation process is informal, confidential, and generally requires less time and cost for all parties than court litigation. Mediation is used to resolve many kinds of disputes, from child custody cases to labor strikes. In the context of the FLM Program, mediation is used to help lenders and borrowers agree on how to resolve agricultural loans that are in default.
University of Minnesota Extension (Extension) has managed the Minnesota FLM Program since its inception. Funding is provided by the USDA, Extension, and the State of Minnesota. The goals of the program are to achieve open communication between the parties, create a nonhostile environment, define the rights and responsibilities of the borrower and creditor, treat all parties with dignity and respect, and produce agreements that are acceptable to all the parties involved.
The State of Minnesota requires a creditor with a secured debt of more than $5,000 against an agricultural property to offer FLM as an option before proceeding with foreclosure, repossession, cancellation of contract, or collection of a judgment. No creditor can start a proceeding to collect debt against a property until the offer of mediation has been extended. And if the offer is accepted, the creditor cannot start a proceeding until the mediation process is completed.
If the borrower chooses to take advantage of mediation, the first step is an orientation session during which the mediator and a financial analyst meet with the borrower and creditor to explain the process and determine if financial information needs to be prepared. The parties sign an agreement to mediate, which outlines a set of behaviors that each participant agrees to, including confidentiality, mediator immunity, binding results of the mediation, and good faith participation. Then, over the next 60 days, the borrower, creditor, and mediator meet regularly to design an acceptable agreement.
The Minnesota FLM Program has proven to be an economic asset to individuals, businesses, and communities affected by loans that are mediated. In fiscal year 2008, the program opened 2,002 mediation cases. Of those, 640 borrowers requested mediation, a 12.6 percent increase over the request rate from the previous year. Nearly 80 percent of mediated cases reached some kind of settlement, meaning farms stayed in business, lenders got paid, and people stayed in their communities. The total amount of debt addressed in mediation case sessions was over $156.3 million in 2008. Over $9.5 million of the mediated debt was owed to locally owned businesses in rural Minnesota. In addition, banks (including some local banks) held $126.3 million of the loans and Farm Service Agencies held almost $7 million.
Despite the growing presence of corporate farmers in the rural landscape, mediation is still mostly benefiting noncorporate farmers. In 2008, 77 percent of people who requested mediation were sole proprietors. The typical borrower had average agricultural debt of $273,521 and median family living expenses of $37,241 per year. In short, the Minnesota FLM Program helps real people and real businesses in real communities.
Lessons for the future
What has been learned through FLM could be helpful to future mediation programs, particularly those that may be created in response to the mortgage foreclosure crisis. According to Mary Nell Preisler, who has served as the director of FLM in Minnesota since 2003, the program offers the following lessons about debt mediation.
Hire the right mediators and prepare them well for the job. The parties in a mediation must have absolute trust in the process. This requires a mediator who can lead and manage the discussion as a neutral party, without making decisions or judgments. The Minnesota FLM Program seeks out people who are skilled at managing the components of the mediation process. These components include ensuring that all participants in a mediation are heard, helping define issues, emphasizing common goals, keeping the discussion focused and moving along, and reducing fault finding.
While knowledge of the process comes first, basic knowledge of the business being mediated is an important ingredient as well. Mediators should have a knowledge base that gives them the vocabulary they need to deal with complex loan situations. Otherwise, the mediator can get "left behind" when in-depth negotiation requires a particular vocabulary or knowledge of contextual information. In addition, the program looks for "soft skills" during the hiring process. These include maturity, wisdom, stability, confidence under pressure, an ability to manage boundaries, and an intuitive ability to "read" people and respond to them.
To prepare mediators for their work, Preisler seeks the best mediation training and provides constant coaching and peer support so the mediators understand their role, perform it skillfully, and reach the best conclusions available.
Always, always, always maintain the neutrality of your organization and your mediators. Neutrality must be reflected in messages put out by the program and in every face-to-face interaction. If there is any doubt that a mediation system will bring balance and neutrality to a discussion of the loans, it will affect the outcome.
Ensure each mediator and staff person knows and adheres to an established code of ethics. The importance of ethics must be reinforced in training, in writing, in supervision of mediators, and in regular organizational reviews. Retention of good, experienced mediators supports this cause, in the sense that they come to "live and breathe" the code of ethics over time.
Mediation programs need to establish proactive, ongoing relationships with intermediaries who advocate for the parties involved. Attorneys for major loan companies, nonprofit and government advocates for the borrower, and all other intermediaries must be apprised of the goals, structure, and approach of the mediating organization. By bringing respectful relationships to the table as mediation occurs, the focus can shift from defensiveness to productivity.
If the parties won't yield, mediation won't work. By far, the strongest predictor that mediation won't work is an unyielding position on one or both sides. Good mediators can recognize whether parties are ready to mediate and prepare them for what that means. Some tell their parties, "You can come in with a plan of action. You can go ahead and put that plan in cement, but you can't let the cement dry." If the mediators are working with parties who are unwilling to participate—for example, if the party is determined to take a case to court—there is little a mediator can do.
Good mediation is also an education for the future. Once a borrower and lender have come to the point of mediation, it is clear that the status quo hasn't been working for either party. The mediation process creates a plan to establish change for the borrower, the lender, or both. It also educates both parties to use better business practices in the future.
As part of the mediation process, borrowers have to make core decisions about what is important to them—what is "sacred" and needs to be kept, what are the needs, and what are the wants. The process teaches borrowers how to create long-term strategies by restructuring their business plans around what is core to their business operations or quality of life.
For the lender, the process provides overall lessons—such as communication skills, business planning skills, industry knowledge, financial management, and more—that can be taken into all future business environments. Learning about the industries that are taking out business loans is especially important. In some situations, such as when a lender has purchased a loan portfolio, the lender may not have in-depth knowledge of all industries in the portfolio. When lenders end up in mediation, they get a more visceral view of the financial issues certain industries face. Awareness of those issues can promote better lending or encourage lenders to get out of businesses where they are not knowledgeable.
Create a system that is ready to address barriers to mediation. There are barriers that can keep borrowers and lenders from getting the most out of the mediation process. For borrowers, the barriers are largely emotional. The process of facing debt and laying it out bare to a host of lenders and outsiders is humbling and can be humiliating. And staying in debt for any period of time requires a state of denial. The words and care that good mediators use are artful in breaking through the denial and creating a productive environment. When it is done well, people understand the mutual benefit. As one debtor put it, "You've made me feel as though we are all in this boat together. It is sinking, but everyone involved has to help paddle, because coming to a resolution helps me, my family, the lender, and the entire community."
For lenders, the barrier is the extended time the process takes, resulting in a deferred resolution of the bad debt. Under current law, the process requires the lender to wait up to 90 days before taking action on a loan. The wait puts the lender's loan portfolio in limbo. This is where earned trust in the FLM Program's process and neutrality is important, because the lender has to take a leap of faith that the process will work.
In Minnesota, lenders have confidence in the FLM process due to the reputation and history of the program. As the numbers mentioned earlier demonstrate, the process works. It provides clarity for the future, it helps lenders establish working relationships in their communities, and it keeps money and people in those communities.
Joyce Hoelting is the assistant director of the University of Minnesota Extension Center for Community Vitality, which administers the Minnesota Farmer-Lender Mediation Program.
A conversation with Mary Nell Preisler
As discussed in our article, the Farmer-Lender Mediation (FLM) Program may be a useful model for other debt mediation programs, including those that deal with the mortgage foreclosure crisis. To learn more about FLM and the distinctions between the foreclosure crisis and farm lending, author Joyce Hoelting spoke with Mary Nell Preisler, director of the Minnesota FLM Program.
Joyce Hoelting: Today's home mortgage crisis includes the problem of loans being purchased by large, distant corporations. Has that been true in the case of farm loans?
Mary Nell Preisler: Yes, we've had relationships with Countrywide's attorneys, for instance, and we frequently are seeking mediation with second and third banks. A problem specific to farming is that these second and third banks do not know the business of farming and its particular industries. For example, soybean farmers have intricate systems of investment and selling, and government programs that they adhere to and benefit from. An outsider to the soybean industry may be much more likely to foreclose quickly on a soybean farmer than those who are in the know. The mediation becomes an educational process in those instances.
JH: How has the mortgage situation changed for farmers in the past 22 years?
MNP: The professional status and sophistication of farming has changed dramatically. It's been years since I've seen records kept in a shoebox. And more often than not, farming is a second or third profession in a family that is making nonfarm income.
JH: The farm crisis that led to the Farmer-Lender Mediation Program has been over for years. What is stimulating the need for mediation now?
MNP: The farm crisis is over, but the amount of farm debt we are mediating is actually growing. It's caused by a myriad of things. Of course, both lenders and borrowers can make bad choices. But there is also the legitimate measure of risk vs. reward in farming, like any industry. We see farmers who have reinvested their entire operation in sustainable agriculture ventures, or who bank on the future of commodity prices or new technologies. When those risks pay off, it's good for local economies. When they don't, we all suffer the fallout.
And then there's just dumb luck and bad luck. Lower gas prices may help some farmers out of a debt that otherwise was headed for crisis. A sickness or family death can do in a business, and few farms can withstand divorce now, what with the complexity of business ownership. When Immigration and Customs Enforcement conducted raids at meatpacking plants in southern Minnesota in 2006, hog farmers lost $30 to $40 per head because the plants weren't staffed to process their hogs when they were the right weight.
JH: In your opinion, what could prevent future crises in farm lending?
MNP: Conservative business planning and maintaining use of cash flow lending would help in some, but not all, situations. Solid business practices and planning, and common sense about debt and lending, will go a long way toward preventing the next crisis.