mony, I sort of took the Agency to task and made some suggestions that were a little bit harsh.

But I want to say to you right here, and I hope he's behind me, I think we're extremely well off to have Harold Bob Bennett as head of our State FSA. He is trying to do a job. Larry Owens andif I'm maligning someone else in the State office, but as far as I've been able to determine, the only man in the State office who really has any depth of expertise in agriculture lending is Larry Owens. Larry and I have had conversations and correspondence, but I just have the feeling that Harold Bob and Larry have been sent out to slay a dragon and the only weapon they've had is a pocket knife. We know how bureaucracy works and they've had a real problem. After a long time in the banking business, I had a short stint with the FDIČ just to make a living and I found out what bureaucracy was about as an employee of FDIC. I thought it was absolutely the most ridiculous thing I'd ever come across. I didn't stay very long. I got out and took a job at Stanton, TX, simply because I wanted to get out of the FDIC. When I began to deal with the FmHA, I found out what a stumbling bureaucracy was really about because the situation hasn't changed down the years.

I will say though that the guaranteed program of the Farmers Home Administration, made it possible for me as the president of a little bank to meet the farming, agriculture financial demands of the dry land cotton farmers in Martin County, TX and that surrounding area made it possible for us, I think, to save the cotton industry in that area. By it being able to increase our lending limit by virtue of the guarantee, we built a small struggling bank into a successful small bank. It had 12 people on staff including me. My success in the Guaranteed Lending Program and building that area, made me attractive to Midland American Bank. And so, they bought me a year ago and now I am a branch, the Stanton branch of Midland American Bank, which is a home-owned, locally controlled bank in Midland. But they wanted that little bank because of its expertise in agricultural lending, and I had to agree to stay with them for at least a year to make the transition over to serve the agriculture needs.

So, the guaranteed program of the Farmers Home Administration has been awfully important to me and my little bank. I think the future of agriculture lending in this country is going to rest in the guaranteed program. There was a lot of resistance to that 10 years ago on the part of the county supervisors. They considered themselves to be loan officers or lenders. They never were and never have been, and their record bespeaks that fact.

But the Guaranteed Lending Program will work. It can be made to work. It's been tough. It takes a lot of paperwork and time. But I simply would say to you that if the guaranteed program is going to succeed, we're going to have to get more participating lenders involved. I've made speeches before bank groups, before FHA groups, before farmers, promoting the participation in the Guaranteed Lending Program on the part of my fellow bankers. It has been a tough sell, simply because of the problems you've heard talked about here today.

In the last 6 months, I have been trying to place a loan that is now in my bank to a substitute lender because the loan was

made it was an illegal loan, very frankly. It was made by my predecessor bank to a director of that bank. The county supervisor and the State executed the guaranty and everything, we thought, was right. But then we all discovered, hey, this is a director of the bank. It's an "insider deal," so you need to move that loan. I've been working with Harold Bob and Larry. Do you know, I've contacted six different bankers and sent the package to them—and there's nothing wrong with the package. It's a good loan. It's current.

I'm having difficulty finding anybody that is even interested in looking at a guaranteed loan outside their immediate community where they know the people involved. Because they say, "Hodges, if we have a loss-if we make a loss claim, we understand you can't get it paid." Now, we read that the turnaround time is from 30 to 90 days. But as I said in my testimony, if I had acknowledgement that the claim had been received-not even worked, but just been received within 6 months, it would cause a fainting spell. Because none of us like to admit we've made a bad loan. The banker on his direct loan, the county supervisor that approved that loan, whoever executed the guaranteed, you don't like to admit that you made a mistake, but we all do make mistakes. A loss claim, when it goes to that county supervisor or now, the agriculture credit manager, is supposed to be reviewed by him. He's the one that knows the detail of the loan. Then it goes to the district director and then into the State.

I promise you, if you get a loss claim worked within a year, you have just about, from my experience, established the norm. My banking friends say, "Joe, we don't want it because we have a loss claim and can't get it paid." The bank regulators are beginning to look at some of these guaranteed loans that are being carried as an asset of the bank and say, "Wait a minute. If that guarantee is so good, why don't you collect that loan, Mr. Banker? We'll consider charging this off. Then when you do collect it, you can take it into recovery." I don't know that that has happened yet. I'm not saying that it has, but I know that threat has been made to one of my fellow bankers in Big Spring.

So, if the guarantee program is going to succeed, it has to be simplified to where you can have a quicker turnaround time on your loan application. You need a more direct response to questions when you have them today because I asked my county supervisorand I'm fortunate. Now, I've got a good one. But when he calls the State office to get answers to a complicated question, they say "Well, Larry needs to tell you the answer to that, but he's out training people to become lenders and we can't give you a direct answer until he gets back." So, there's even been a time delay there, and it's not their fault.

But the absolute necessity, as I see it, is an expedient program of handling loss claims, if it has to be set up an office somewhere that that's all they do is look at loss claims. But when that county supervisor gets a loss claim, to acknowledge he's gotten it. Let us know where it is. I sent a letter to you-made a copy of this, that on April 4 of last year, I filed a loss claim and asked for acknowledgement of it and is there any other information that you need?

I received no response. I followed up in two weeks, a letter. Finally, he called and said, “Oh, that's gone on to the State office." Fine. Well, this was in April. In September when one of the jump teams was coming into help, I get a call from that county office and said, "Oh, can you give us some updated information on this? We've been notified that it needs to be in the State." I said, "What are you doing calling me from the county?" "Well, it never has been looked at." That was from April 4 to September 9. I gave updated information to a man who called me. I think he was out of Georgia, was a member of that task force, and I updated him. He said, "fine." But it came too late. He didn't get it finished.

Now, I'm working for somebody else. I don't make my own rules. My directors are asking me every directors' meeting, "What is the status of that loss claim that has been filed since April 4?" And so, I'm having to be honest. I'm having to call and bug Larry Owens or Harold Bob Bennett or someone, so I can put some memo in the file that I followed up on this. So, every time you get asked for updated evidence. So, it can be a very simple matter. I mean, it's either justified or it isn't, but somebody needs to look at it. Hey, I've got bank friends who are pulling out of the program because of this. This is a matter that desperately, in my opinion, needs to be addressed.

Bobby Lemmons from Colorado City over here asked me—he said that he's had a problem of getting the same interpretation of rulings from different county supervisors he works with. One tells him one thing. One tells him something else, and this is the way an agency like this works. But there does need to be some coordination of opinions of what the regulation really is. Then there was the question about this loan packaging that always in the past, the farmer makes an individual contract with the loan packager and he pays him. I have no idea what the fee is and don't want to get involved in it. But Bobby tells me that he's talked with someone in one of the offices he deals with that said, "Well, it's coming down the pike that the bank is going to have to pay that fee instead of the farmer, so I'm starting to impose that now so that in this next loan, you will pay that fee." If I'm lying, why you tell me about it

now.

But at any rate, there needs to be a coordination, a better understanding of what we're doing. And yes, the financial program for the farmers of America, in my opinion, is wrapped up in the Guaranteed Loan Program that needs to be set up and operated by someone who knows the lending business. You don't become a lender in a 2-week crash course of how to make a loan. You do it the hard way by sitting behind that desk and making those loans, and making the mistakes and making the successes.

Thank you.

Mr. COMBEST. Thank you, Mr. Hodges.

[The prepared statement of Mr. Hodges appears at the conclusion of the hearing.]

Mr. COMBEST. Mr. Harmon.

STATEMENT OF BILL HARMON, LUBBOCK PRODUCTION CREDIT ASSOCIATION, ON BEHALF OF THE FARM CREDIT SYSTEM Mr. HARMON. Thank you, Mr. Chairman, and other members of the subcommittee.

It is an honor to have you guys in Lubbock today and we appreciate the opportunity to testify before you.

My name is Bill Harmon and I'm the president of the Lubbock Production Credit Association. We are a cooperative lender. We're locally owned and controlled by our membership and our customer borrowers. As a part of the nationwide Farm Credit System, we are chartered for the exclusive purpose of making production type

loans.

Unlike commercial banks, we don't take deposits. We obtain our funds through the sale of systemwide securities. As our loans are repaid, then we repay our loans to repay those bonds. And although our source of funds is unique, we also have the same problems as our commercial bank friends have mentioned. We certainly concur in most cases, and have had basically the same problems arise that have been mentioned.

In 1996, we had just over $7 million in guaranteed loans. That was about probably 32 borrowers. In the rest of Texas, I think the combined portfolio probably of other PCAs, the other 12 PCAs in Texas, was probably $25 million. The $7 million represented about 7 percent of our peak loan volume which, as I said, represented about 32 borrowers. So, it's certainly important that the program is important to us as a lender, and certainly important to those 32 borrowers.

We certainly appreciate USDA and having the availability of the program so that we can utilize it. It is greatly appreciated by our borrowers that take advantage of it and make use of it. But that's not to say that improvements can not and should not be made. The fact is, our institutions would utilize this program to a greater degree if it were more user friendly. And many of these problems that do not make it user friendly have been pointed out already.

Some Farm Credit institutions remain extremely frustrated by the low level of responsiveness and expertise that they receive from their local FSA office. Now that's not to say all offices have not treated us right and fairly, and given us good service because some certainly have. But in some cases, it's a matter of inconsistent regulatory interpretation. I guess that is really one of the main problems that we see in the program. It would appear that it's a program that you would think all those fellows would be on the same page, but certainly, they're not. We would think it would be a great improvement if that were the case. The bottom line is that today's marketplace demands an increasingly higher standard of service from financial institutions. If USDA is going to successfully participate and be an integral part of today's agricultural credit market, they need to step up to the challenge.

In addition to these and other administrative issues, and for the record, I've attached some detailed examples to my written statement. There are also policy issues that we believe warrant consideration. In the 104th Congress, Congressman Dooley, the ranking member of this subcommittee, sponsored a bill to provide greater access to credit for farmers. Among other things, this bill would

have allowed higher loan limits on operating and farm-ownership loans. We certainly support this approach and believe it is a necessary update to assist in financing an increasingly modern and high-cost agriculture industry.

Although the current $400,000 limit is a lot of money to most of us, it often does not go very far in today's modern farming operation, especially in times of economic stress. As agriculture has evolved and production costs have continued to increase, USDA's guaranteed loan program also needs to be modernized to help meet these financial needs.

The current $400,000 limit was established, I believe, in 1984, 13 years ago. This limit worked well for several years, but it is simply inadequate today for many farmers. Farmers are compelled to operate on an increasingly larger scale in order to minimize per unit costs and maintain a reasonable standard of living. In addition to the increase in the size of the operations, operating costs and capital outlays have increased significantly due to inflation and more and larger equipment. Quite simply, if the intent is to keep some of these operators in business, the guaranteed limit needs to be increased. Current limits have not kept pace with the increased size of operations and input costs. USDA's guaranteed loan program needs to be upgraded and modernized to help meet these increased financial needs.

This concludes my oral statement and I certainly appreciate the opportunity to testify. Thank you.

[The prepared statement of Mr. Harmon appears at the conclusion of the hearing.]

Mr. COMBEST. Thank you very much, Mr. Harmon, and all the members of the panel.

There was a lot of common areas of concern here, but I found it very interesting that in virtually every testimony throughout the entire of all-you said no one county has the same rules and regulations to follow. In most cases, the loan officer that is assigned to the guaranteed loans knows regulations better than the county FSA employee. Mr. Townsen said rules are poorly written, outdated and in general, are not adhered to. Mr. Hodges mentioned in his, this particular instance was speaking of Mr. Lemmons who had suggested to him, defined it as different rules.

The first concern you listed, Mr. Harmon, in your testimony was inconsistencies in interpretation of regulations by FSA personnel. In fact, on down in your testimony that you had submitted, Mr. Hodges, you had one paragraph that I thought was quite interesting. It said, "I'm personally aware of FmHA borrowers who are delinquent on upwards of $500,000, who are making no payments but who have been able to maintain a good credit status by official complaints, threats, formal appeals, et cetera. Countless others have had debt deferred for up to 5 years without payment of interest, much less principal. And yet, these borrowers remain eligible for additional loans: direct, subordinated and guaranteed. This is the program in practice.”

Those are some, obviously, pretty concerning statements by those of you who are involved in lending.

Mr. Mauldin, since you had pointed out that these had come from your bank, this is a bank that your loan carries directly?