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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 I find those rules are completely outdated.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 They're outdated.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.


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

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 FDIC 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?

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