Mr. MAULDIN. The one on the right is.

Mr. COMBEST. Yes, this one?

Mr. MAULDIN. Yes, sir.

Mr. COMBEST. Actually, you said it was more of an involved agricultural operation than this one, which was strictly cotton?

Mr. MAULDIN. Absolutely. This one involves a compost operation, over 1,000 head of cattle, over 2,000 acres of land that's being farmed by wheat, cotton, milo-I'm forgetting a crop out there. Did I say corn, silage that is a very extensive operation and that thing passes our examiners like that. And it's got everything in it. It's got cash flows. It's got current financial statements. It's got everything.

Mr. COMBEST. This is your file of a guaranteed loan?

Mr. MAULDIN. That's right. I'm going to use it for wallpaper on my new house someday.

Mr. COMBEST. Big house you're building.

Mr. MAULDIN. Big house, yes.

Mr. COMBEST. Mr. Wright, you mentioned that yours would basically be the same. But I don't want to put words in anybody's mouth, I assume that kind of is the case throughout. It's not like bank examiners are not pretty stringent in their examinations. Mr. MAULDIN. They're extremely thorough.

Mr. COMBEST. It's not like that when you have a bank examination you want a portfolio on a borrower that is not thorough, obviously, to get through that examination. And if you were basically a non-regulated industry, a person could say, "Well, gee, you all just want to make this easy." But probably some of the concerns we hear most are from people who have had visits by their examiners and that how thorough they were.

The point you made about that you heard of a bank that examiners are questioning the validity of the guaranteed loan because of the delay in getting a claim approved if, in fact, that loan goes bad. Those things begin to cause real concerns in what it is that examiners are going to say to you as bankers if they come into your office and begin to look at these, even though you've had to go through all this work.

Would it be possible, do you think—and I realize this is just one part of the country and there's going to be a lot of other parts of the country that are interested in this as well. Without giving you a whole lot of extra work, would it be possible for you all to come up, as a committee or whatever, a group-maybe Mike, you're here representing TBA. Maybe TBA could do it or ABA or whoever. I recently met with their agriculture lending committee in Washington-to come up with what you would-not just "this is what it ought to have," but actually, the papers. I mean, you could come up with what you would think would be an adequate knowing your experience as lenders, knowing your experience in dealing with examiners who come in and look at you very carefully-and thorough application for farm loans through farm services?

Mr. MAULDIN. If you had a rule pad, I probably could do it real quick. And I don't say that facetiously. I mean, the Farmers Home plan, I've always said, is a very complete document. It's got financial statements. It's got cash flow. The second page talks about did you pay out last year? Did you not? We're going to get all the other

documents for our stuff because the examiners look at it. So, what else is needed?

You need to comply with all the regulations and statutes that you, Congress, have come up with. Well, that's a single piece of paper that signs off, "no, I didn't bribe a Congressman. I've complying to the best of my knowledge, with all the environmental statutes." They sign off on that, a single signature. And when I say a rule pad, in my opinion-and I haven't talked to these other gentlemen about this basically, what are we applying for? Are we applying for a $400,000 crop loan? What's going to be the collateral? So, go over that and then, you know, the people in FHA know the Farm and Home Plan. That's their document.

So, basically, we've got one document says what I'm applying for. The next document says, you know, here's my financial statement, here's the cash flow. And leave it to us to lend the money. Leave it to us to do the inspections. Leave it to us to do the other. If they want to come in our banks and do the checklist as we're having now, that's fine. Make sure we're doing it. I don't care. But turn that stuff around. You know, it's not that hard. That's why I get so cotton-pickin' angry about it. It's not that hard.

Mr. COMBEST. Yes. From the political reality of this, I think, which is obviously important. Talking about doing something that we can't get done is wasting everybody's time.

But I will play a little bit of the devil's advocate in what I think we would have to make sure we provide. There will be a real potential outcry by groups outside of what we're talking about here, farmers and bankers. It came back when we were looking at the Preferred Lender Program and the Certified Lender Program back in the early 1990's when we were doing that. It is that you can not allow the private sector, i.e., a bank, to make a loan that is dedicating or is potentially spending Federal dollars because this is to their own interest to do this. So, you can't just leave them out there alone and let them go do this. You've got to have a very strong oversight.

Mr. MAULDIN. I agree.

Mr. COMBEST. To some extent, I agree with that. We need to make—well, theoretically. What we would need to do, if we can ever move toward streamlining that process, is to make for certain that the penalty for violating that is so severe that a bank can not afford to violate it.

Mr. MAULDIN. Mr. Wright had pointed out, pull the lending authority.

Mr. COMBEST. Well, yes, or pull something.

Mr. MAULDIN. I'm saying, they should still underwrite it. I mean, they should still look at it because they're the only ones that should have the authority to obligate the Government. We will still send in our application to be reviewed, but you're not going to have this mound of paperwork. But much like the SBA's process. The SBA's process, if you look at their application, it's about like that thick, depending on which application you have. But SBA rates the lenders. If you've got this huge loss ratio, your turnaround time may be much greater, they may pull your authority.

Mr. COMBEST. Well, do you feel comfortable I'm going to let you all get in here, but I want to run one more thing by you. Do you

feel comfortable in mentioning what, theoretically, you have mentioned to me before just in discussions about the fact that we need to look more at the farm loan as a business loan? Maybe you want to just have one lending authority and

Mr. MAULDIN. Sure. Well, I've mentioned several times, I can't understand why one agency appears to be able to do so much more than another agency. Farmers, they produce crops. They start with a product. In the case of cotton, they start with a seed and they produce a product called cotton. And it's the same thing as if I go down here to someone who's making widgets. They take the raw material with steel and they produce those widgets or whatever it is.

And so, many times, we are treating these loans like they're not a business loan. They're exactly like a business loan. They have to have cash flow to pay. It's harder to compare their financial statements as you would a business because of the time frames. Maybe you can't count on the money coming in maybe as consistently as a regular business loan, but you can still analyze the financial statements. An experienced lender can analyze a farm statementan experienced farm lender, let me clarify that, can analyze a financial statement just as easy as an experienced business lender

can.

No, I don't see any difference in the two. You're talking about different products is all we're talking about. The rest of them, they deal with the medium exchange called money. Other than that, you know, it's cash flow, same thing.

Mr. COMBEST. Any other comments anyone would like to make? Mr. TOWNSEN. One comment I'd make on the documentation. Of course, we all use the same documentation, basically, all the banks. We're all controlled by the same agencies.

Mr. COMBEST. Every bank lender?

Mr. TOWNSEN. That's bank lenders. We're all doing the same thing.

The other thing is that oftentimes, a lot of this documentation comes from additional requirements in the conditional commitment letter sent out by FHA. FHA sends out a conditional commitment saying, "Yes, we will approve it based on the requirements that you have said you're going to make in the loan. And in addition, here's an addendum," and sometimes that's as much as two pages, typewritten pages, of additional requirements that either the local supervisor has put on it, the district office has put on it, the State office. That causes a lot of servicing problems. It causes a lot of this documentation. And they're not necessarily based in the rules and oftentimes, have nothing to do with the general rules that they have written as far as servicing loans.

Mr. COMBEST. Mr. Stenholm.

Mr. STENHOLM. Mr. Chairman, I understand that I misspoke earlier when I said that packaging is required by law. It is not required by law. It is the training that is required by law and the reason for the packaging is the complexities of the packages. I understand that I misspoke earlier, so I would like to correct the record on that and the clarification of the rules.

The last questioning of the chairman indicate where, from a Congressional standpoint, we have to look at what is called "proper

oversight." I remember in the 1980's when Congress was persuaded to remove considerable amounts of oversight over the savings and loan industry in the United States, and we paid a very dear price.

I think, and you've stated this in your own testimony here, all of you are very supportive of the Direct Lending Program, or the Guaranteed Lending Program. But you've expressed yourself very, very forthrightly regarding the problems and the difficulties. And unless these are corrected, it's going to be very difficult for you to continue to participate. Or even more importantly, those that are not participating, who have chosen not to participate because they really didn't want to get into to the degree that you have and that you have testified here today. That is a very real problem.

One area that is a potential problem, and that's why I asked the question of Ms. Cooksie today, regarding the dramatic improvements in the delinquencies in direct lending. What was the results of the Guaranteed lending? I was glad to hear that in Texas, we have gone from 1.25 delinquency to 1.79 on an increased loan portfolio of $400 million. That is a good record, I would think. I don't know what you would care to compare it, but it doesn't lend itself to an alarming figure. We have had a GAO study that has suggested, at least nationally, that there may be a problem in you— and I'll say this affectionately-bankers finding you have a trouble loan and you're looking for a way to shift it 90 percent over to the Federal Government.

One suggestion that has been made, and I ask for your comment on it, that as we look at establishing rules, what would be your reaction to a suggestion that if you have a current farm loan, business loan-and I like that term. If you have a current farm loan and you find it beginning to get to a position in which you do need to move to a guarantee, that you would have to subordinate that to a neighboring bank. That you could not continue to participate in that loan, that that would be one that you would have to bring to a neighbor.

Reaction?

Mr. MAULDIN. I wouldn't like that. As far as my concern, it wouldn't bother me that ABC Bank would have to take that loan. My only problem is, we're here to service the farmer, the one that's producing basically the revenues for all of us to exist: the banks, Congress, I mean everyone. They're the ones producing the true product.

My problem with that is, would you kick the person out you're working with to go to another bank if it wasn't his choice?

Mr. STENHOLM. No. The manner in which this question is asked-we've been through this in the medical profession with doctors that would refer to their own clinic and the fees that were incurred, and the perception. You know, I have yet to find but a very small percentage of abuse, but it's the perception.

I asked the question for you to think about and to respond, as you have. But if GAO, which is an overseer of USDA-if they have concerns being expressed, then if not this suggestion, what other safeguards might we have so that the perception of a shifting of the risk, conveniently to benefit your individual bank or as you're here on behalf of TBA, the perception of having it subordinated which

you routinely do whenever you have a loan in which it exceeds your loan limit. That is a routine business experience.

Any other comments about that?

Mr. TOWNSEN. Maybe we shouldn't be relating this back to SBA but the requirements on the Small Business Administration is that if it is an existing business, that it has to have shown a history of profitability to be able to service the debt. The case that you're referring to, we wouldn't be able to shift that to a guaranteed loan situation because it probably would not have shown the history of profitability to be able to service a debt adequately.

Mr. STENHOLM. No, the hypothetical I asked you, you've been servicing that loan for a period of years. But now because of whatever has happened

Mr. TOWNSEN. Losses. Primarily, losses.

Mr. STENHOLM. Losses.

Mr. TOWNSEN. And those losses would probably knock it out, under the SBA guidelines, of being a valid application under a guarantee.

So, that is not one of our big concerns. Our big concern in banking is not taking our loans that are having problems and converting them over to guaranteed loans. We don't do that very much. I mean, that's what people think we do, but that's not what we do. We don't try to move those over. Now, if there is some other reason: some losses in equity or some reason, or maybe they need to grow. But basically, the rules of SBA prohibit that from happening in Small Business and I think it would be a good rule for FHA also. Mr. COMBEST. Bill?

Mr. HODGES. Mr. Stenholm, let me make a comment. You talked about the improvement of the delinquency ratio in the direct lending program of the FSA. The delinquency ratio really, as we all know, had reached alarming proportions. It became obvious that something needed to be done and the word was sent down from on high to every one of these State directors, "You will see that this delinquency ratio is decreased."

I would like to know how many dollars have actually been collected. How much interest has been paid? How much debt has been reduced in reducing this delinquency ratio? I'd willing to sit here and say very few dollars, because these delinquent loans have been brought current through two or three different programs but which primarily, consist of a deferral of debt. You can have a delinquent loan, go in and under one or more programs, you can get that debt made current and payment deferred for up to 5 years. It automatically reflects as current on the register.

Some of them require no payment. I know of one man, a customer of mine, who got a deferral-he wanted to be a customerfor five years. The program says that in order to qualify for that deferral, he would have to pay $1 a year. Another one, he has to pay $3 a year. But his delinquent debt has been brought current by deferral and it now reflects on the register as a current debt. So, I'm really wondering what the true improvement of delinquency has been.

Second, if you think that the loss ratio in the Guaranteed Lending Program has gone up a little bit, but I think we can safely sit here today and state with the increase in the use of the Guaran