Testimony By Mr. Pete Haddeland President and CEO First National Bank in Mahnomen Mahnomen, Minnesota
On Behalf Of The
Independent Community Bankers of America
Washington, DC
Review of USDA Loan Programs
Agriculture, Nutrition and Forestry Committee U.S. Senate
June 13, 2006
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Review of USDA Farm Loan Programs
Thank you Chairman Chambliss and Senator Harkin for holding this hearing today and thanks to the other members of this committee that have an ongoing interest in USDA’s farm loan programs. My name is Pete Haddeland. I’m the President and CEO of the First National Bank, Mahnomen, Minnesota. I’m also the Vice Chairman of the Agriculture-Rural America Committee of the Independent Community Bankers of America. ICBA is the only national trade association that exclusively represents community bankers and is the largest national banking trade association with 5,000 members. The First National Bank of Mahnomen is a $56 million independent community bank. The bank has one facility. Mahnomen is a community of 1,200 located in northwestern Minnesota. We are located on the edge of the Red River Valley of the North. Our area rarely is dry. Our primary crops are soybeans, corn, wheat, sugar beets, and sunflowers. Our largest agricultural income is derived from grain farm operations. The region has a reputation for raising quality, high-yielding corn and many tons or sugar beets. Summary of ICBA Position ICBA strongly opposes the proposed fee increases for USDA’s farm loan programs. Those bearing the burden of the new and higher fees would be those least able to pay the added costs since by definition these producers are not able to get credit elsewhere. Higher fees may also result in fewer lenders being involved in the loan programs. New and higher user fees penalize a very cost-efficient program where only a small amount of money can leverage billions of dollars of private sector funding into our rural communities. Congress should adopt legislation to prevent the new and higher user fees from taking effect October 1st. Further, there are a number of additional aspects of USDA farm loan programs that Congress should pay close attention to as we get closer to writing a new farm bill. Local Market Conditions To understand why USDA loan programs are important to us, it may be useful if I begin by describing the agricultural market conditions in our local area. Agriculture is very important to our economy and to our bank. Agriculture represents at least 20% to 25% of our total portfolio. The majority of our agricultural loans are for equipment or production loans. The line of credit amounts have expanded over the last several years as input costs have increased. Land rents in our area range from around $85 to $95 per acre, up slightly from the last several years. Fuel and fertilizer are more expensive each year.
3 Farm real estate prices continue to increase and are up slightly, about 3-5%, this year. Hunting and recreational land sells for the same price, if not more, than farmland. Most of that recreational land is sold for cash. Farmland to the east of us sells for 20% to 25% less than land to the west due to the quality of the soil. The price of land has been driven up by two consecutive very good production years. While farmers have produced good crops in recent years, the advent of higher fuel and production prices and higher land prices have caused concerns among many farmers. For the 2006 year, we expect that with a normal crop year, our farmers’ income will decline from last year due to normal yields and high input costs. Therefore, we expect farm financial stress to increase. So while farm enterprises are expected to have above average performance in 2006 they are not expected to be as good as they were over the last two production years. Importance of USDA Farm Loan Programs At times of greater financial stress in agriculture, it is especially important to have effective guaranteed loan programs to rely on. Obviously, with higher production expenses and higher land values, it has become more difficult to get into farming if you’re a young or beginning farmer and more difficult to stay in farming if your operation’s profits are being squeezed. Fuel and fertilizer expenses have increased significantly in the last year and these higher costs may not abate in the near future. Some farmers will try to find ways to lessen their production costs, perhaps by switching from corn to soybeans temporarily, but that will deplete the fertilizer in the soil and they’ll need to switch back to corn as part of their rotations and pay the higher fertilizer costs. Any increased costs will be particularly detrimental to the farmers who qualify for the FSA loan programs. Our Bank’s Experience Our bank has over a dozen guaranteed farm loans, representing 10 percent or more of our bank’s agricultural loan portfolio. We consider the program important for assisting a number of our borrowers. These loans include real estate, production and equipment loans. We’ve also used this program as a way to help young or beginning farmers get started. The USDA’s loan programs help us keep our farmers in business during the rough stretches when extending them credit could become a question in the minds of our banking regulators if these programs were not there. It has also helped us get young farmers established and helped them create viable farming operations. USDA’s Proposed Rule to Increase User Fees We were quite disappointed when the Administration announced as part of its fiscal year 2007 budget that it would propose new user fees and increase existing user fees in the FSA loan programs.
4 This would make credit more expensive for many of farmers and ranchers. Using higher fees and new fees to fund USDA’s guaranteed loan programs, which serve borrowers unable to get credit without such guarantees, shifts these costs ultimately to the borrower. In this case, the cost is shifted to borrowers that are unable to obtain credit elsewhere, making it even more difficult for these operators to show a profit. The administration’s proposed rule, issued May 15, has several components. First, it would raise the one-time fee on guaranteed loans from the current level of 1 percent to 1.5 percent – a fifty percent increase. This higher fee would apply to both guaranteed farm ownership (real estate) loans and guaranteed farm operating (production) loans. In addition, there would be a totally new fee of ¾ of a percent, 75 basis points, applied annually to lines of credit. Therefore, if borrowers had a mix of loans, they could see their costs in fees alone double or triple, especially over a period of a couple of years. Furthermore, USDA’s proposed rule states: “This proposed rule provides that the level of fees charged for a guarantee may change in the future without promulgation of a rule to amend the guaranteed loan regulations.” This suggests that fees could go even higher than noted above with no opportunity for public comment. That is why we believe that legislation should be enacted to defeat this proposal before its October 1 commencement date. These fees, which would be effective beginning October 1 unless blocked by legislation, will raise the cost of borrowing for many family farmers when they can least afford it. Weather-related disasters and higher energy costs have seriously eroded the equity position on many farmers’ balance sheets. When they may need the program more than ever, USDA is intent on imposing higher fees resulting in higher borrowing costs. Remember, even though these loans are guaranteed up to 90 percent by the government, commercial banks are also putting their capital at risk in making these loans. If loans become questionable due to higher fees, it will become more difficult to convince regulators and the banks’ internal loan review committees that the loan should be made in the first place. This new fee schedule would make it harder for FSA borrowers, who turn to USDA loan programs as a last resort to show a positive cash flow, which evidences that they will be able to repay their loan. Shifting the programs modest cost to financially strapped borrowers is clearly the intent of the proposal. The administration’s proposed rule states: “This proposal is based on the expectation that there will be sufficient demand to maintain the loan level, which means that borrowers are likely to be willing to pay higher fees to obtain the loans at less cost to the Government.” The higher fees on guaranteed loans and new fees on lines of credit also work against a fundamental goal of USDA’s loan programs, which is to ‘graduate’ producers from a dependency on government-backed credit into non-subsidized commercial loans. By making it more difficult for producers to repay their loans or to take longer for
5 repayment, these producers’ dependence on government loan programs is lengthened, not shortened. The bottom line result of these changes is that financially stressed farmers and ranchers will have a more difficult time maintaining a viable farm operation and there will be fewer community bankers remaining involved in the program. Is this really what is best for rural America? We think not. This doesn’t make sense when one considers that the USDA guaranteed farm loan programs are some of the most cost-efficient programs in the department, where a few million dollars can guarantee a billion dollars in loans to keep farmers afloat. This efficiency should be rewarded, not penalized. The OMB is being short-sighted because even though they want to see performance-based results in their programs, they have seen fit to penalize one of the government’s most cost-efficient programs. This is yet another reason why Congress should continue moving forward with legislation to block USDA’s proposal. A Fair Public Review of USDA’s Proposed Rule? Even when the House Appropriations Committee incorporated language into the fiscal year 2007 appropriations bill recently adopted by the House, the message was apparently not received by the USDA and the OMB. The proposed rule mentioned above was quickly released after the full House had passed its bill with the language against these new and higher fees included. If the USDA is not willing to listen to the opposition against this proposal, as contained in several letters to USDA by both House and Senate members and passage of legislation by the full House blocking the proposal, should anyone really believe that USDA will take the public’s comments seriously? This appears to be a pre-determined outcome by USDA – unless Congress acts. Comparison to the SBA Program There has been some suggestion that fees were raised in SBA’s programs and this has not hurt demand for SBA loans. We need to first realize that agricultural loans are not ‘cookie-cutter’ loans and often need very hands-on and personal attention from lenders. This is also particularly true in accounting for collateral after a default since USDA requires lenders to verify losses and the disposal of collateral. Secondly, what has actually happened in the SBA program is that the number of lenders providing these loans has significantly decreased. Many community banks that were providing several SBA loans annually have been forced to stop providing these loans which have become more expensive to provide to their potential borrowers. As a result, there has been a larger concentration of these loans made by larger banks.
6 In fact, active lender participation in the program has declined by nearly 50 percent according to the SBA: FY 2001 # lenders making at least one 7(a) loan = 5,228 FY 2005 # lenders making at least one 7(a) loan = 2,751 Again, we ask, is this really the model that should be applied to the USDA farm loan programs? Do we really want to raise the costs on vulnerable farmers and ranchers while decreasing the number of lenders participating in these programs? Some Ideas Going Forward Mr. Chairman and members of this committee, USDA farm loan programs are vitally important to rural America. They provide an efficient way to extend credit to those who wouldn’t otherwise be unable to acquire loans, while keeping the private sector intimately involved in the program’s operation and on the hook for financial loss if producers’ default. The loss ratios have been very low in the guaranteed loan programs. A small amount of money can be leveraged to extend billions of dollars of credit to the farm sector through the programs. We should do all we can to ensure the programs’ future success. In our view this means we should keep the fees low as we emphasized above. Beyond that, we need to make the program as user-friendly as possible for both borrowers and lenders. This includes ensuring the low-doc loan programs work well; ensuring there is quick turnaround time on loan decision making and minimizing regulatory burdens. We need to make sure loss claims are paid promptly without foot-dragging by the agency. We need to ensure we foster an attitude of ongoing support for the programs on the part of agency administrators and field staff. Going forward, instead of raising user fees, we may need to assess whether more resources are needed for these very efficient programs and whether the loan size-limitations have become too constraining for modern-day agriculture and need to be raised. Conclusion In conclusion, we’d like to say ‘thank you’ to the House and Senate members that have sent letters in opposition to USDA’s proposed fee increases and for the language prohibiting the new user fees that is included in the House Agriculture Appropriations bill. We urge the full Senate Agriculture Committee to weigh in with the Senate Appropriations Committee urging adoption of similar language as contained in the House appropriations bill blocking USDA’s proposed user fee increases. ICBA will offer further comments on USDA loan programs as we move closer to the adoption of a new farm bill and we look forward to working with members of this committee. Thank you.
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Additional Information
View the USDA’s proposed rule at this link:
http://a257.g.akamaitech.net/7/257/2422/01jan20061800/edocket.access.gpo.gov/2006/pdf/E6-7326.pdf
Funding at a Glance as of June 1st, 2006
Program Guaranteed Operating Unsubsidized Guaranteed Farm Ownership Guaranteed OperatingInterest Assistance Direct Operating Direct Farm Ownership Emergency National Totals FY 2006 Allocations $1,197,029,000 $1,409,982,000 $271,888,000 $645,353,000 $205,927,000 $173,675,000 $4,005,853,000 Funds Used as of 06/01/06 $753,808,000 $652,696,000 $236,310,000 $510,826,000 $181,700,000 $38,064,000 $2,373,764,000 Total Unused Funds $443,221,000 $757,286,000 $35,578,000 $134,527,000 $24,227,000 $135,611,000 $1,632,089,000
Source: USDA No. of Loans Made 4,109 2,200 1,182 11,742 1,424 543 21,201