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April 8, 2004
Joseph Pigg Senior Counsel Phone: 202-663-5480 Fax: 202-663-7541 jpigg@aba.com
Deputy Administrator for Farm Loan Programs USDA, Farm Service Agency DAFLP/STOP 0520 1400 Independence Avenue SW, Washington, DC 20250-0520
Re: Proposed Rule; Regulatory Streamlining of the Farm Service Agency’s Direct Farm Loan Programs; 7CFR Parts 761 through 769; 69 Federal Register, No. 26, 6056; February 9, 2004. Dear Sir or Madam: The American Bankers Association (ABA) appreciates the opportunity to comment on 7CFR Parts 761 through 769, “Regulatory Streamlining of the Farm Service Agency’s Direct Farm Loan Programs”. In general, the Farm Service Agency (FSA or Agency) has done a commendable job of consolidating a myriad of regulations to create a new set of loan making and loan servicing guidelines that should make administration of the FSA direct loan program easier for agency staff and make it easier for farmers and ranchers to understand. The ABA brings together all categories of banking institutions to best represent the interests of this rapidly changing industry. Its membership—which includes community, regional and money center banks and holding companies, as well as savings associations, trust companies and savings banks—makes ABA the largest banking trade association in the country. The ABA strongly opposes one of the proposed definitions found in 761.2 “Abbreviations and Definitions”. FSA attempts to define a “family farmer” using the following criteria: (1) Produces agricultural commodities for sale in sufficient quantities so that it is recognized as a farm rather than a rural residence, and in a typical year generates net cash income that improves the family’s standard of living; (2) Generates or will generate in a typical year annual gross farm income which does not exceed the greater of $750,000 or 95 percent of the statistical distribution of the income of farms in the state with gross sales in excess of $10,000 based on the farm data and survey of farm economic factors most
recently published by the National Agricultural Statistics Service (NASS), USDA, or any successor agency; (3) Has both physical labor and management provided as follows: (i) The majority of day-to-day, operational decisions, and all strategic management decisions are made by : (A) The borrower and persons related to the borrower by blood or marriage, for an individual borrower; or The members responsible for operating the farm, in the case of an entity. (ii) A substantial amount of labor to operate the farm is provided by: (A) The borrower and persons related to the borrower by blood or marriage, for an individual borrower; or (B) The members responsible for operating the farm, in the case of an entity. (4) May use full-time hired labor in amounts only to supplement family labor. (5) May use reasonable amounts of temporary labor for seasonal peak workload periods or intermittently for labor intensive activities. We believe that point number 2 of the proposed “family farm” definition is severely misguided because it places, for the first time, an arbitrary cap on income to determine if a farm is a “family farm” or not. We do not find a relevant connection between reported income and whether or not a farm is a “family farm” or a “non family farm”. This is especially true in the context of the rest of the proposed definition. We agree with much of the rest of the definition wherein the agency correctly proposes examining how the operation is viewed in the community, and who the management and labor providers are. We believe all of these criteria provide proper guidance to loan approving officials. Further, we are concerned that the income cap will unnecessarily lead to additional confusion because of the many ways farming enterprises can elect to report their income. For example, an enterprise that reports income and expenses on an accrual basis, could be determined to be ineligible due to the income cap, but may be eligible for FSA financing if they reported income on a cash basis. An enterprise that experiences an extraordinary, and non-repeating income event, may be deemed ineligible the year they apply for credit, but in a typical year would be eligible for FSA funding. The agency fails to discuss what happens if a guaranteed line of credit borrower is eligible one year, but is not eligible the next year. Is the borrower prohibited from drawing on their line of credit in the year that they are deemed ineligible? What if the projected income is lower than the actual income (“generates or will generate in a typical year”) for a new borrower and the actual income is more than the cap when the actual performance of the enterprise is reviewed? Does FSA tell this new borrower to pay off their loans? In this same example, what if the enterprise needs additional credit? Does FSA tell them to find credit elsewhere? Enterprises that produce high value crops may be unnecessarily discriminated against simply because their enterprises produce more income than other types of farms. Specifically, we are concerned about the impact on family
owned orchards and nurseries, wine producers, specialty floral producers, high value breeding stock producers, and other specialty enterprises that would meet all of the other criteria described in the proposed definition, with the exception of the income cap. FSA fails to recognize an essential element of their direct and guaranteed loan programs that should make an income cap irrelevant. FSA loan size is capped by statute. Any enterprise that can be financed by the relatively modest size of the direct and guaranteed loan programs should qualify as a family farm as long as the rest of the proposed definitional criteria are met. An operation that is dependent upon FSA financing, direct or guaranteed, is not going to be an enterprise that will be beyond the realm of a family sized operation. With caps on loan size set by statute, the agency in the past has correctly focused on more important criteria in determining the eligibility of the enterprise. We urge the agency to continue that focus. Finally, we do not see the need to create a new and improved definition of a “family farm” since the existing definition has served the agency and the public well. It has provided a framework that allows applicants, loan approving officials, and other parties (like guaranteed lenders) to come together and examine the nature of the business, to determine who makes the management decisions, to determine who provides the labor, and to sample community sentiment toward the enterprise. We do not believe that the proposed definition adds any clarity to the question, and would unnecessarily exclude some family farmers from USDA assistance. Sincerely, Joseph Pigg Senior Counsel