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?

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