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storm. Hopefully, this will provide you with some idea of why the USDA or the FSA lending programs are so important to our area.

The American Bank of Commerce is an FSA Certified Guarantee Lender. As of February 13, 1997, we had outstanding loans under the 90-10 guarantee program of $10,291,559 and we have several loans that are pending which will increase this total. This represents almost one-fifth of our total agriculture loan portfolio of ABC Bank. As you can see, the Certified Lender Program is very important to us as a bank, as well as our customers. It allows us to help that producer who has suffered a loss due to weather and other factors and give him time to overcome that problem. Even though it is still a paper burden—and I will have to agree with Mr. Mauldin. Our files will look just exactly like this in our guaranteed program. That is very, very representative of that. Even though there is still a paper burden, we're willing to try to help our customer.

We have one loan officer that is dedicated to the FSA paperwork and will be training—we hired a new loan assistant and we'll be training that loan assistant in some of the reporting procedures. We've also had some problems in some counties in getting a response in the time allowed by the Certified Lender Program. It is amazing to me in the 15 years that I've been involved with agriculture lending that no one county has the same rules and regulations to follow, either the bank or the lender is held fast to certain perceived rules.

In most cases, the loan officer that is assigned to the guaranteed loans knows the regulations better than the county FSA employees. Our frustration is that when we work so hard to do what is required, then the FSA lenders feel they can do whatever they want and whenever they want. Now, there are several counties that we have no problems with and it is a pleasure to work with them. We understand that the problems at the county, at the district, at the State level, these people are working hard to change this. We recognize that this is coming from the top. This is coming from Washington. This is coming from the USDA. That's one reason I don't have a problem in calling Jimmy Clark and Congressman Combest. I'm not trying to get these folks in trouble. We try to get to the source of the problem.

You asked for suggestions for improvement. We understand that FSA is working under Government guidelines and we know that Government has no common sense. There are banks and other lending institutions that take advantage or abuse the guaranteed program. But don't take it out on those of us who are doing it right. Turn the Guaranteed Lending Program over to the bankers, the people who are trained and know how to loan money. Monitor the loans, the loan losses. Any bank that abuses the program would be limited or out of the program for a specific time period. Under the Certified Lender Program, FSA is certifying that the lender is capable, willing and has the resources to lend money under the guarantee basis. The certified lender is certifying that they have abided by the rules and the regulation. The FSA staff is to do a 90-day review after the loan is closed to check and see if the lender did the proper documentation.

Let us do our job the way we know how to do it. Please guide the FSA to do their job in an efficient manner. Why would anyone pull their loan officers out for a week of training during the middle of loan season? Why would anyone detail a loan officer to south Texas to work housing loans during the middle of the loan season? Why would anyone detail a loan officer from east Texas to west Texas to work loans they have no idea about? Our crops start going in the ground in late April, early May and people can't wait that long for money to begin their land preparations. The suppliers, the dealers are all extending credit to these guys, based on whether FSA is going to approve or make that loan. If the decision is not made until June or July, we've got other people who are hurt.

The FSA Guaranteed Program is a very good program and it can help producers who have stumped their toe to get back on their feet, while allowing us as commercial banks and other lenders the opportunity to help their customers.

As I close, let me express my sincere appreciation to the committee for allowing me to show you how important it is, as Congressman Combest has said, that we have an infrastructure of the USDA loan programs, Farm Credit system, and other commercial banks to meet the future needs of our agricultural producers. My family is dependent on it as well as yours.

Now, as you leave today, I've inserted a thing I'd like you to take with you and look at. In 1896, William Jennings Bryan said it best. “Burn down your cities and leave our farms, and your cities will spring up again as if by magic. But destroy our farms and the grass will grow in the streets of every city in the country.” As long as the North American farmer can supply our food at a price that allows us to spend the greatest part of our income for our cars, our TVs, our recreational items, our high standard of living can continue. But when our farmers can no longer produce this low-cost food and fiber, or when they have no economic incentive or ability to produce this, truly again, “The grass will grow in the streets of every city of the country."

Thank you very much. Mr. COMBEST. Thank you, Mr. Wright. [The prepared statement of Mr. Wright appears at the conclusion of the hearing.) Mr. COMBEST. Mr. Townsen. STATEMENT OF DON TOWNSEN, FIRST NATIONAL BANK,

SPEARMAN, TX Mr. TOWNSEN. Thank you. I appreciate it.

I'm Don Townsen, president of First National Bank in Spearman, TX. Spearman is about 90 miles north of Amarillo, up in the Northern Panhandle. I've been an agricultural lender and a FHA guaranteed lender since 1974. I have just closed, on February 3, probably my last FHA guaranteed loan unless some drastic changes are made. The only reason I closed that loan is because we started on February 6, 1996. He spent over $5,000 in application fees and in packaging and travel, and I felt compelled to do it with him.

One of the things about FHA lending and this customer, this customer had an FHA guaranteed loan that was a 7-year loan. It matured in early 1996. We made the applications, not because he was a poor credit but because I needed the extra help to keep him in my bank because he was larger than my loan limit would allow. Well, for that whole year, that loan that matured in early 1996 was delinquent. So, I think you'll find in some of the figures that you're hearing that some of the delinquencies are caused by the system themselves. That customer was delinquent for a year while we were waiting to get approval on a new loan.

We have an organization in the Northern Panhandle called the North Panhandle Bankers Association. I know, Mr. Chairman, you're familiar with that organization. It's a very good organization of the bank presidents of the Northern Panhandle of Texas. To prepare for this testimony, I called all the presidents or wrote all the presidents to give me their comments, and I have submitted some letters to you from those individuals giving their experience. I also have some letters there from some of our customers giving the problems, merely to back up my testimony that this is not a small deal in my bank or a few banks. This is a large problem.

Like Mr. Mauldin, I have testified previously back when Congressman Sarpalius was looking into it. You know, we've had a lot of things done over the last 20 years to try to solve the problem. We haven't done a very good job of it.

I want to address, really, five areas. One of them is the rules. In the last 2 years, I've had an opportunity to really study the rules of FHA as far as the Guaranteed Loan Program is concerned. I find those rules are completely outdated. They're very general in their nature. They allow for individuals in the agency and the bureaucracy to determine their meaning themselves, for their own purposes. There is no requirement. There is no method by which the FHA people or FSA people have to comply with the time frames or the rules themselves. They're outdated. As far as I'm concerned, they're not any good at all as far as the bankers' use and being able to make the program work.

I understand and I hear from the other panel that there's a lot of training involved. Gentlemen, bureaucrats can't train bureaucrats. We have problems because FHA wants to be a lender and they don't know how to lend money very well. They've not been successful direct lenders and it's pretty hard for them to tell bankers how to lend money in that situation. I do believe that we can do a lot of training in FSA and use a lot of the people that they have, but that training needs to come from outside. All we're doing training each other inside that bureaucracy is perpetuating an obsolete system.

The loan application approval process is, of course, very complicated and much too slow. The application process has created a whole industry called FHA packagers, and not only the packagers but also the people who write the programs for these packaging units. They write them for banks. They write them for packagers. It's very common for a borrower to have to spend from $3,000 to $5,000 to get a loan application completed. For these types of borrowers, that's ridiculous. I mean, none of my borrowers have to go out and hire packagers to make a loan application. You know, if we did, I couldn't stay in business. We can't stay in business that way with FHA applications either.

One of the other areas I want to mention is the cost of loan servicing to the bank. Because of the outdated rules, the outdated techniques of servicing loans, it costs me almost twice as much money to service an FHA guaranteed loan as it does to service the other like comparable loans in my bank. You can see the difference in documentation. That's a big part of it. Not only that, but trying to keep up with the rules and techniques of the servicing because those rules are obsolete as far as modern farm industry is concerned. As you know, the farm industry changes pretty fast. We have to change and adjust ourselves, the rules that we operate under Farmers Home Administration or through the FSA are outdated. It causes us to have to use different techniques to service those loans as our other loans and costs us a lot more money. Consequently, we also tend to price those loans a little bit higher.

The time required to collect from FHA. In 22 years of FHA lending, I've made one loss application, made it 2 years ago. I still have not been able to collect on it. I still don't know whether I'm any closer to collecting on it than I was 2 years ago. This was a very simple liquidation program. It was a father and son who recognized that they could not make it. We couldn't get additional credit for them. They volunteered to liquidate themselves. One of the problems with the rules is the rules do not address a self-liquidation program as opposed to a forced liquidation program. So, all of the rules and all of the requirements, time requirements and everything, was imposed on my bank as if we were in a forced liquidation program and we were doing the liquidation. We were not doing the liquidation. The farmers were honest, hard-working people who knew that they couldn't make it. They went out and cleaned up the machinery. They set up the sale. They sold private treaty to get more money. They sold a lot of their personal assets. They did a good job and saved us a whole lot of money in liquidation.

The FHA, in reviewing my request for the payment on the guarantee has just nitpicked it to death. Every item that was sold in that sale, we had to go back and look at the previous appraisal and match that amount that we appraised it for up with what the item brought. If there was a difference there, then we had to justify that difference. Well, as you know if you've been to a farm sale, you know there's hundreds of items, you know. This application for the payment of the guarantee has been through at least three different hands. It's now in the fourth hands.

We've redone the application at least twice, and one time under the direction of our local supervisor. No one, apparently, who reviews that for payment talks with the local supervisor. He was involved in the loan for the whole term of the loan, but the people who review it for loss don't consult with the local supervisor as to what was happening on that loan. It has been a very frustrating process.

I have another deal here that someone else may be bringing up. A Southwest farm advisor says “Farm borrower report, loan guarantee gotcha." You know, I feel like I've been in that “gotcha” deal here for the last 2 years. It would be well to read that if you wouldn't mind. I have some copies so that you can see some of the problems that we're involved with.

I had one of the other bankers ask me to bring up that the time frame for customers to stay in the Guaranteed Loan Program is an issue with them, the 15 year time frame. Graduating out direct borrowers and subordinated borrowers to the guaranteed programs—they go to the banks and ask them to take these customers. Well, what I find is that if that customer is in the program for 10 or 12 years and then we go into a guaranteed program, and then that time frame is going to end. You know, what are we going to do with that customer? That's a issue. It hasn't been an issue for me. My bank is only about 11 years old, so it hasn't been an issue for me. But it has been for one of the other bank presidents of the Northern Panhandle.

The system needs to be completely changed, like SBA. SBA was changed and if I recall correctly, back during Reagan's administration, he decided that there was enough problems with the Small Business Administration that they needed to do away with that administration. Fortunately, the Small Business Administration people went together. They got some bank panels, bankers to help them. They created a system that works. It worked very well. It's very good for the bankers and good for the Small Business community of our rural communities, especially. I believe that that's what needs to happen here.

SBA changed a lot because they started looking at themselves as underwriters, not as lenders because they're not experienced lenders. Neither is FHA experienced successful interest. The only people out there are the banks and the PCAs that are doing the lending. They need to be underwriters. They need to set a simple set of rules for underwriting and we can abide by those rules. There's no problems with that. But it's very difficult for us to lend money when inexperienced bureaucrats are overseeing us and trying to tell us how to do it from an outdated system.

They need to view us like SBA views us, as customers and partners in an effort to help our communities, rather than oversight people who are trying to keep us in line with some type of idea that they must provide lending with an oversight that they control.

Thank you.
Mr. COMBEST. Thank you very much, Mr. Townsen.

[The prepared statement of Mr. Townsen appears at the conclusion of the hearing.)

Mr. COMBEST. Mr. Hodges.

STATEMENT OF JOE HODGES, MIDLAND AMERICAN BANK,

STANTON, TX Mr. HODGES. Thank you very much, Mr. Chairman, Mr. Thornberry. And it's always good to see my old friend, Charlie Stenholm from so many years ago neither one of us like to think about it, I imagine.

I've been in the banking business since January 1950, although I'm only 39. We've been down the path a time or two and I had never made an agriculture loan until about 11 years ago when I took over a small struggling bank in Stanton. If I had known what bad shape it was in, I wouldn't have taken the job. But as it turns out, and I want to say—well, first, let me say, in my written testi

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