SPEAKERS CONTENTS INSERTS
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71–121 DTP
2001
2001
THE FARM CREDIT ADMINISTRATION'S PROPOSED RULE PROVIDING FOR THE ISSUANCE OF NATIONAL CHARTERS FOR THE FARM CREDIT SYSTEM
HEARING
BEFORE THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
MARCH 7, 2001
Serial No. 107–3
Printed for the use of the Committee on Agriculture
www.agriculture.house.gov
For sale by the Superintendent of Documents, U.S. Government Printing Office
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Internet: bookstore.gpo.gov Phone: (202) 512–1800 Fax: (202) 512–2250
Mail: Stop SSOP, Washington, DC 20402–0001
COMMITTEE ON AGRICULTURE
LARRY COMBEST, Texas, Chairman
JOHN A. BOEHNER, Ohio
Vice Chairman
BOB GOODLATTE, Virginia
RICHARD W. POMBO, California
NICK SMITH, Michigan
TERRY EVERETT, Alabama
FRANK D. LUCAS, Oklahoma
SAXBY CHAMBLISS, Georgia
JERRY MORAN, Kansas
BOB SCHAFFER, Colorado
JOHN R. THUNE, South Dakota
WILLIAM L. JENKINS, Tennessee
JOHN COOKSEY, Louisiana
GIL GUTKNECHT, Minnesota
BOB RILEY, Alabama
MICHAEL K. SIMPSON, Idaho
DOUG OSE, California
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ROBIN HAYES, North Carolina
ERNIE FLETCHER, Kentucky
CHARLES W. ''CHIP'' PICKERING, Mississippi
TIMOTHY V. JOHNSON, Illinois
TOM OSBORNE, Nebraska
MIKE PENCE, Indiana
DENNIS R. REHBERG, Montana
SAM GRAVES, Missouri
ADAM H. PUTNAM, Florida
MARK R. KENNEDY, Minnesota
CHARLES W. STENHOLM, Texas,
Ranking Minority Member
GARY A. CONDIT, California
COLLIN C. PETERSON, Minnesota
CALVIN M. DOOLEY, California
EVA M. CLAYTON, North Carolina
EARL F. HILLIARD, Alabama
TIM HOLDEN, Pennsylvania
SANFORD D. BISHOP, Jr., Georgia
BENNIE G. THOMPSON, Mississippi
JOHN ELIAS BALDACCI, Maine
MARION BERRY, Arkansas
MIKE McINTYRE, North Carolina
BOB ETHERIDGE, North Carolina
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LEONARD L. BOSWELL, Iowa
DAVID D. PHELPS, Illinois
KEN LUCAS, Kentucky
BARON P. HILL, Indiana
JOE BACA, California
RICK LARSEN, Washington
MIKE ROSS, Arkansas
ANÍBAL ACEVEDO-VILÁ, Puerto Rico
——— ———
——— ———
——— ———
Professional Staff
WILLIAM E. O'CONNER, JR., Staff Director
LANCE KOTSCHWAR, Chief Counsel
STEPHEN HATERIUS, Minority Staff Director
KEITH WILLIAMS, Communications Director
(ii)
C O N T E N T S
Clayton, Hon. Eva M., a Representative in Congress from the State of North Carolina, prepared statement
Hilliard, Hon. Earl F., a Representative in Congress from the State of Alabama, prepared statement
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Lucas, Hon. Frank D., a Representative in Congress from the State of Oklahoma, opening statement
Stenholm, Hon. Charles W., a Representative in Congress from the State of Texas, opening statement
Witnesses
Burns, Philip, chairman and chief executive officer, Farmers and Merchants National Bank, West Point, NE; representing American Bankers Associaiton
Prepared statement
Dean, John, Independent Community Bankers of America
Prepared statement
Harris, Jerold L., president and chief executive officer, Farm Credit Bank of Wichita, Wichita, KS, representing the Farm Credit Council
Prepared statement
Jorgensen, Ann, member of the board, Farm Credit Administration
Prepared statement
Reyna, Michael M., Chairman and Chief Executive Officer, Farm Credit Administration
Prepared statement
Submitted Material
Hester, Ed, chairman of the board, Federal Land Bank Association of North Mississippi, FLCA
THE FARM CREDIT ADMINISTRATION'S PROPOSED RULE PROVIDING FOR THE ISSUANCE OF NATIONAL CHARTERS FOR THE FARM CREDIT SYSTEM
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WEDNESDAY, MARCH 7, 2001,
House of Representatives,
Committee on Agriculture,
Washington, DC.
The committee met, pursuant to call, at 2:00 p.m., in room 1300 of the Longworth House Office Building, Hon. Frank D. Lucas, presiding.
Present: Representatives Goodlatte, Moran, Thune, Simpson, Ose, Fletcher, Pickering, Johnson, Osborne, Rehberg, Graves, Kennedy, Stenholm, Condit, Peterson, Dooley, Clayton, Holden, Berry, Etheridge, Boswell, Phelps, Larsen, Acevedo-Vilá.
Also present: Representative Lucas of Kentucky.
Staff present: David Ebersole, senior professional staff; Ryan Weston, Jeff Harrison, Callista Gingrich, scheduler/clerk; and Russell Middleton.
OPENING STATEMENT OF HON. FRANK D. LUCAS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OKLAHOMA
The CHAIRMAN. The hearing will come to order.
I would like to welcome everyone to today's hearing to review the Farm Credit Administration's proposed rules providing for the issuance of national charters for the Farm Credit System.
This is the committee's first hearing this Congress to provide our members the opportunity to gather facts and viewpoints from persons, both public and private, who are charged with providing credit to this Nation's farmers and ranchers. I would like to make it clear that this hearing will not be the last one on credit matters.
Chairman Combest is working diligently to find a consensus to write prudent commodity programs to restructure and replace those which will expire in 2002. Additionally, we must begin the process of working to find a consensus in other areas of the farm bill that will also be of great importance to producers. Credit is, indeed, one of those areas. Today's hearing is not a review of the entire Farm Credit System. Hearings to review and provide for all agricultural credit needs will occur later in this year. Today we will focus on FCA's proposed rule to allow national charters.
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Both the Farm Credit System and commercial banks have done an outstanding job of servicing their communities' credit needs. It is Congress's job to ensure that credit needs are met in a manner that provides fair and equitable competition. Congress has spent a great deal of time the last few years modernizing America's finance laws. We must enable rural America to keep pace with the rest of the world.
I hope this hearing will help determine if we are moving in the right direction, and I look forward to today's testimony. And with that, I would like to turn to the ranking member for any opening comments he might offer.
OPENING STATEMENT OF HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. STENHOLM. Thank you, Mr. Chairman. And I want to commend you for taking the initiative in scheduling this oversight hearing on the Farm Credit Administration's proposed rule on national charters. It is certainly timely as the public comment period on the proposed rule is still open. There are many misperceptions regarding this national charters proposal. This hearing should provide a frank and thoughtful forum to clarify and correct some of these misunderstandings.
At best, the Farm Credit Administration's national charters proposal will allow agriculture producers more credit choices, resulting in competitive interest rates and better loan products. However, with any change comes risks and the national charters proposal is no different. If this proposal goes forward in any form, then the Farm Credit Administration must be vigilant in its regulatory role in ensuring the safety and soundness of the Farm Credit System.
I am hopeful that this hearing will provide Chairman Reyna and the FCA Board with suggestions or ideas on possible ways to improve their national charters proposal. I look forward to hearing your testimony and asking questions. Thank you, Mr. Chairman.
Mr. LUCAS of Oklahoma. Thank you, Mr. Stenholm. The Chair would request that other members submit their opening statements for the record so that the witnesses may begin their testimony and to ensure that we have ample time for questions.
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[The prepared statements of Mrs. Clayton and Mr. Hilliard follows:]
PREPARED STATEMENT OF HON. EVA M. CLAYTON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH CAROLINA
Mr. Chairman and Ranking Member Stenholm, I want to thank you for calling these important hearings today. The Farm Credit System, while not perfect, has served our nation's farmers, and therefore, our entire nation, for over 80 years. Today we have an opportunity to examine that System in hopes that it will continue to serve All American farmers.
At issue before us today is the Farm Credit Administration's proposed rule providing for the issuance of national charter's for the Farm Credit System. However, this belies a much larger question that will occupy us not just today, but as we move forward in the reauthorization of the farm bill. The question before us is how do we continue to serve the needs of American agriculture in an era of a global economy, industrial agriculture, and mobile capital. At issue is the fate of the small farmer, the limited-resource farmer, and the fabric of rural America in the face of circumstances that are viewed at the same time as both challenges and opportunities.
As we proceed with the hearing today, I would hope that our distinguished panelists will bear in mind that one of the roles of government is to provide public goods in those circumstances in which the market will not naturally produce them. The market can do enormous good but I think that many of us here recognize that the role of Government is not just to assist the market, but to supplement the commonwealth where the market fails.
It is therefore my hope that our panelists will bear in mind that the Farm Credit System was created as such a public good. In the absence of a credit system that adequately provided for the particular needs of American agriculture, the Federal Government stepped in to ensure the continued vitality of the agricultural sector. The Farm Credit System may in fact need to be updated and modernized to respond to market forces, but remains a public good justified not just by how it can mirror the market, but also by how it can support those for whom the market has not been sufficient.
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This translates in today's hearings into my concern regarding how the Farm Credit System will continue to serve small farmers, minority farmers, and local needs and service area within the context of a national charter. I am concerned, if entirely convinced, that the issuance of national charters will jeopardize the ability of local Farm Credit Association's to respond to the needs of their grassroots constituents as envisioned when the Farm Credit System was put in place. Ilook forward to hearing this important question debated in today's hearing.
Thank you for the opportunity to talk Mr. Chairman.
PREPARED STATEMENT OF HON. EARL F. HILLIARD, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ALABAMA
Mr. Chairman, fellow Members and guests, I want to remark briefly on a concern I have with the proposed rule we are considering today, regarding the Farm Credit Administration's proposed rule providing for the issuance of national charters for the Farm Credit System.
Alabama is one of the four legislatively protected States, and the land banks in our State would have to give specific consent if federally chartered associations were to operate in their territories. Due to this, I do not have any specific concerns for the fact of federally chartering of associations.
My concern regards the absence of specific reference to ''socially and economically disadvantaged'' when discussing ''young, beginning, and small farmers.'' There is great historic precedent in Congress that socially and economically disadvantaged Americans be specifically included in all our services, rules and regulations. History has shown us that, when we fail specifically to include these Americans, they are all too often neglected.
Further, when underserved areas are discussed in the rule, socially and economically disadvantaged farmers should be specifically cited, due to the historic problems that have arisen when we have ignored them. As Congress considers this rule, and in all its work, we must see to it that historic errors are not perpetuated into the present and the future.
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It will cause no problem for those who are not included in the definition of socially and economically disadvantaged farmers, since they will not be excluded from any assistance or from any loans. However, if these socially and economically disadvantaged farmers are not specifically cited, history has shown us that they may well be neglected.
I look forward to the testimony which will be given today, and want to thank those who will testify for all their work and commitment to our farmers today.
Mr. LUCAS of Oklahoma. I would like to invite our first panel to the table. The Honorable Michael Reyna, Chairman and CEO of the Farm Credit Administration of McLean, Virginia, who is accompanied by the Honorable Ann Jorgensen, who is a Board member of the Farm Credit Administration.
Mr. Reyna, you may begin when you are ready, sir.
STATEMENT OF MICHAEL M. REYNA, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, FARM CREDIT ADMINISTRATION
Mr. REYNA. Good afternoon, Mr. Chairman, and members of the committee. I am Mike Reyna, Chairman and Chief Executive Officer of the Farm Credit Administration. And, as you mentioned, joining me is my colleague, Ann Jorgensen, who is a member of the Board, but also serves in another very important capacity, as the chairperson of the Farm Credit System Insurance Corporation. And I am pleased that she is here with me today.
I request that my full statement be inserted in the record so that I may concentrate my remarks today on the proposed FCA regulation concerning national charters for System institutions.
America's farmers and ranchers provide the country, and, indeed, the world, with a nutritious, safe, and economical food and agriculture products. The role of the System is to provide sound, dependable, affordable credit to those farmers and ranchers and cooperatives, rural utilities, rural home owners, in both good times and bad.
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The primary role of the Farm Credit Administration is to ensure the safety and soundness of the System. I am pleased to report that the financial condition of the System is strong despite challenges and difficulties in today's agricultural economy. The System is the oldest GSE in the country, Government-sponsored enterprise, and it has been serving the credit needs of American agriculture since 1916. Today the System has more than 1,100 offices across the country, which offer financing to all types and sizes of farmers and ranchers. Credit is also provided to processing and marketing operations, certain farm-related businesses, rural housing, agricultural cooperatives, rural utilities, and the import and export of agricultural commodities.
The System has nearly 26 percent of the market share for agricultural loans, compared to about 41 percent held by commercial banks. Appropriate administration has been directed by Congress to promote a safe, sound, and competitive system that will finance the credit needs of America's producers in rural communities now and in the future.
To that end, the System must have the flexibility to face economic stresses and the changing environment in which it operates. The financial health of the Farm Credit System today, as seen in the quality of the loan assets, risk-bearing capacity, stable earnings at capital levels, is due to the System's efforts over the past decade to rebuild financial strength and improve its management systems. These improvements were made, in large part, as a result of FCA's regulatory and oversight direction.
Perhaps the biggest challenge facing today's System is that it is a single-sector lender in a shrinking market. The loan portfolios of System institutions are concentrated in agricultural commodities. In addition, the charters of many System associations have combined them to specific geographic territories where the agricultural economy is dependent upon two or three commodities. These geographic boundaries increase the vulnerability to natural disasters or price fluctuations in these commodities.
These are unique challenges to the continued safety and soundness of the System and to FCA, as its regulator. Before I discuss the proposed national charter rule in greater detail, let me point out that the ideas expressed in this rule are not new. Indeed, the FCA and the System, commercial banks, their trade associations, academicians, policy experts, had debated this issue, the removal of the geographic restrictions on System associations for several years. More specifically, the proposed rule is the result of more than 10 years of discussion and debate about ways to ensure the System remains safe and sound.
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In May 1990, the Secretary of the Treasury issued a report on GSEs that recognized this System faced unusual business risks. The report acknowledged that System charters limited the operation of individual associations to the specific geographic regions, causing an institution's performance to rise and fall with the fortunes of a single crop or perhaps those of a limited number of customers. And that is a quote. I might note that while the Secretary's report made no recommendations about how best to solve the problem, it generated an evolving debate which extends even until today.
The FCA Board adopted the proposed rule this past January and sent it to the House and Senate Agriculture Committees for a 30-day review period. The proposed rule was published in the Federal Register on February 16, for a 30-day comment period. It will close on March 19. So this hearing is, indeed, very timely.
I want to assure you that the FCA will seriously consider and carefully weigh all substantive comments that we receive about the proposed rule. The proposed rule would establish clear standards so that direct-lender associations may apply for, receive, and operate safely and soundly under a national charter. A national charter authorizes a direct-lender association to exercise only those powers conferred on it under the Farm Credit Act and FCA regulations throughout the United States and the Commonwealth of Puerto Rico, or any lessor territory that we may specify. No direct-lender association that is under a final cease and desist order will be eligible to receive a national charter. Once an association receives a national charter, the FCA reserves the right to restrict that association's operation if it fails to operate safely and soundly. And our history, over the last decade, certainly has proven that we have not failed to act when appropriate.
The proposed rule also establishes procedures by which associations will apply for and potentially receive a national charter. Additionally, each association that obtains a national charter must comply with new regulatory business and planning requirements. These business plans must be updated every year.
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At a minimum, an acceptable business plan will include a clear mission statement, internal and external factors likely to affect the association during the planning year; quantifiable goals and objectives; pro forma financial statements for each year of the plan; an operating budget, a capital adequacy plan; and a detailed plan for an association's activities in its Local Service Area. And I will get to that in greater detail in just a minute.
Each nationally chartered association must comply with statutes and regulation that govern capital adequacy, loan underwriting, servicing requirements, internal controls, consumer protection, equal credit opportunity, and fair lending practices. Additionally, the FCA will only allow those direct lender associations that operate in accordance with all safety and soundness standards to lend and offer related services nationwide.
With regard to serving local borrowers, each association that receives a national charter will be assigned a Local Service Area, or what we call an LSA. For existing associations, this LSA is the territory that they served immediately before receiving a national charter. Existing FCA regulations already require that Boards of Directors of each institution to annually adopt a 3-year operational and strategic plan. The proposed rule specifically requires the business plan of each association to include this LSA.
Under the proposed rule, the LSA plan must, at a minimum, include a description of all segments of the association's existing market, including both current and potential customers; evaluate how well the association is serving each segment of its existing market, again, both current and potential customers; assess underserved segments in the association's existing market; assess the association's capacity to serve all segments in its existing markets, again, including both current and potential customers, and any constraints on this capacity; and describe strategies that the association will pursue to ensure that it provides full service within its LSA.
Under the proposed rule, each association with a national charter must offer credit-related services in its LSA. Specifically, each association with a national charter must provide dependable, sound, adequate, competitive, and constructive credit and all related services to all eligible and creditworthy customers within its LSA on a priority basis, certainly consistent with safe and sound lending practices.
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The FCA expects each nationally chartered association to undertake special efforts to serve young, beginning, and small farmers in its LSA, and, indeed, Congress has required that as part of the Farm Credit Act.
Congress has very clearly directed the System to provide ''a permanent system of credit for agriculture that will be responsive to the credit needs of all types of agricultural producers having a basis for credit.'' You may be interested to know that as of 1999, 16 percent of the System loans were made to young farmers, 23 percent were made to beginning farmers, and 55 percent were made to small farmers. Agency guidelines for System institutions and examination standards emphasize the commitment to these producers.
Over the past several years, FCA and the System have undertaken several initiatives to identify and reduce risks inherent in the ever-changing marketplace. Many System associations have merged, consolidated, or restructured their operations in the past 3 years. As a result, they are now more efficient, they have lowered the cost of credit, they have improved customer service, and increased earnings of these borrower-owned institutions.
System institutions have also embraced technological innovations and routinely use the Internet to reach their customers. These changes have many beneficial aspects, of course, but more must be done, however, to ensure that the System will remain a dependable source of credit in good times and bad, when other sources of credit, in fact, may have been withdrawn or just simply not available.
The FCA proposed rule on national charters will help modernize the System's credit delivery structure while ensuring safe and sound operations. The rule would end FCA's practice of generally issuing exclusive territorial charters to direct-lender associations. The FCA's authority to grant and amend charters in the System institution is clear and unambiguous. The Courts have reaffirmed this authority on several occasions.
With limited exceptions, the Farm Credit Act does not require exclusive charters for System Institutions. And, in fact, some territories of System Institutions have overlapped for some time, some upwards of 10 years. This over-chartering has not posed any safety and soundness concerns to date.
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Let me emphasize that national charters will not expand the lending powers of System institutions. The proposal will not enable a System association to enter a new credit market that it cannot serve under existing law. And the proposal does not authorize an association to lend to an ineligible borrower or make loans for purposes that are not authorized under the act or its implementing regulations.
The Farm Credit System is cooperatively owned by the farmers and ranchers who borrow from the associations and who have billions of dollars of their own capital in these associations and at risk. They invest great personal time and effort in management, control, and direction of the associations. This cooperative ownership and the principle of one person, one vote, ensures that the needs and concerns of local producers are a focus and a priority of each institution.
The farmers who own the national chartered association will still elect their Board of Directors and a majority of those will be farmers. It seems doubtful that these directors would allow management to offer lower interest rates and better credit terms to large operators in other parts of the country than they will allow for themselves.
In addition, FCA regularly examines System institutions, a process that includes a thorough review of pricing practices. The FCA Examination Manual states:
The practice of setting interest rates with a willful disregard for the costs of doing business to attract or retain borrowers, is an indication of unsafe and unsound banking practices.
I can assure you that while System stockholders would not accept such actions, the FCA, as the System's regulator, would not tolerate such practices either.
In conclusion, Mr. Chairman, I believe that the Farm Credit System must meet the challenges of a rapidly changing agricultural economy. And even more importantly, I believe that the System must succeed in meeting its congressional mandate, which is to provide sound and dependable and affordable credit to farmers, ranchers, and their cooperatives in every economic environment. The System has made significant progress in building and maintaining financial strengths so that it can better serve customers, however, the pace of change in the rural economy is increasing, and the System must remain flexible if it is going to continue to serve the credit needs of agriculture in rural America.
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Improving geographic diversity and reducing the industry concentration in System loan portfolios is essential in mitigating safety and soundness risks. I believe the proposed rule on national charters ensures that the System remains a dependable source of credit for farmers in a competitive and rapidly changing economy.
Thank you, Mr. Chairman, and, members, for the opportunity to address this committee about the challenges facing the Farm Credit System and the Farm Credit Administration and to explain the proposed rule on national charters. I would be pleased to answer any questions at this time, but my colleague may also have comments that she would like to submit. Thank you.
[The prepared statement of Mr. Reyna appears at the conclusion of the hearing.]
Mr. LUCAS of Oklahoma. Absolutely, Mr. Chairman. Ms. Jorgensen, would you like to add any comments to Chairman Reyna's statement?
STATEMENT OF ANN JORGENSEN, BOARD MEMBER, FARM CREDIT ADMINISTRATION
Ms. JORGENSEN. I just have a few brief comments. Mr. Chairman, first of all, I want to thank you and the committee members for allowing me to appear before you today and to submit a statement for the record. Chairman Reyna's testimony addresses our national charter initiative and the Board's position on these issues.
I have been involved in these issues for the time that I have been on the FCA Board, and that is almost 4 years. Based on the extensive information I have, I have no reservations in my support for the removal of geographic restrictions for the Farm Credit System. I also believe FCA has the existing statutory authority to issue and amend charters, including granting nationwide charters.
There are several points that Chairman Reyna made that I would like to reiterate. First of all, farmers, ranchers, and rural America are ultimately the beneficiaries of removing geographic restrictions. They will have additional choices of FCA lenders. I view these opportunities as positive. The customer is the winner when there are more choices and competition.
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Second, there are no new addition or additional lending authorities, but the farmers and ranchers will be able to take advantage of the existing authorities. They will be able to use new delivery tools, such as the Internet, with the System institution of their choice. The System's public policy mission will also be enhanced through expanded business plan requirements for the LSA. In the rule, the FCA established new criteria and standards to be included in the business plan that will be submitted with their national charter application.
And, lastly, the safety and soundness of the Farm Credit System lenders can be strengthened through geographic and commodity diversification. As the regulator, our primary responsibility is to the safety and soundness of the System. FCA will continue to be diligent in our examination process.
Again, thank you for allowing me to be here, and I will be happy to respond to any questions.
[The prepared statement of Ms. Jorgensen appears at the conclusion of the hearing.]
Mr. LUCAS of Oklahoma. Thank you.
To begin the questioning, Mr. Chairman, I would like to touch for a moment on some of your testimony where you stated that FCA has a clear authority to issue national charters. Would you explain that statement in more depth and detail and provide to my colleagues on the committee some of the background that went in to the rationale of that decision?
Mr. REYNA. Certainly, Mr. Chairman. The act—and I can get you the specific provision of the act. There is a clear provision in the act that allows for FCA to charter an institution, which would entail granting the territory that that institution can serve, as well as the types of authorities and lending authorities that it can use in that territory. We, on a routine basis, since the beginning of the Farm Credit System, have issued charters. It is a routine way of conducting business and the act, in its language, is significant. And, as I stated in my testimony, courts have reaffirmed that authority repeatedly.
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Mr. LUCAS of Oklahoma. If I could persuade you, perhaps, to go a little farther into depth as to why it is necessary at this time, to take that step, is what I am asking, Mr. Chairman.
Mr. REYNA. On a policy basis, the rationale for the step is, as stated in the testimony, which is to ensure greater geographical diversification in the portfolios of System institutions. In the testimony, there is a significant number of institutions that, when you review their portfolios, are narrowly concentrated in a handful of commodities that, due to price fluctuations or disease or pests, could wipe out not only a farmer, but potentially bring down an association. So by diversifying the portfolio, you actually make the institution safer. It goes back to the rule we all learned as children not to carry all of our eggs in one basket.
Mr. LUCAS of Oklahoma. I suppose on first blush, Mr. Chairman, one of the questions that comes up—and you touched on it briefly and I am compelled to ask this—if part of the goal is to achieve diversity of that commodity concentration risk, will associations in one region of the country have the expertise, perhaps, to be involved in different commodity areas than perhaps other regions of the country, in your——
Mr. REYNA. As a regulator, what we will be looking at—and the rule envisions that our examination team will take a look at the submissions that are provided by the revisions to their business plan, their strategies, their goals, objectives. And on an ongoing basis, our examination teams have a pretty good feel for the capacity of each individual association. So we are going to seek input and receive input from our examiners before we issue a charter as broad as a national charter to ensure that the associations have the capacity to carry out the plans that they envision.
Mr. LUCAS of Oklahoma. Thank you, Mr. Chairman. And I now turn to my colleague, Mr. Phelps, if you have a question.
Mr. PHELPS. I don't, Mr. Chairman. Just thank you for this hearing and I am anxious to learn more about your charters.
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Mr. LUCAS of Oklahoma. Thank you. Mr. Moran, of Kansas.
Mr. MORAN. Mr. Reyna, hello. Nice to see you and have both you and Ms. Jorgensen in front of the committee today. Would you just briefly describe for me the financial health of the Farm Credit System today? And then are there examples of where lack of ability to diversify on a geographic basis the portfolio of the lending institution has caused difficulty for that institution? You talk about the value of this and spreading the risk across the country or through various regions because of weather-related disasters or otherwise. Are there examples of where that type of circumstances caused difficulties for a particular Farm Credit Bank?
Mr. REYNA. Fortunately, there are no banks or associations that have failed as a result of the concentrations in their portfolios yet. I think it is prudent to act when the health of the System is good. And, in fact, the System over the last 7-plus years has earned over a billion dollars, a portion of which goes to build capital in the associations and the banks. The other portion is rebated out and back to the owners of those institutions.
So they have been successful across the board in improving the financial health of the System. The capital levels are at the highest they have been, to my knowledge. They have continued to build since the late 1980's and on through to today. Capital is approaching between 15 and 16 percent, which is a very healthy level, and, as a regulator, we like to see that. And I am sure, as Congress, you are happy to see that too because you don't want the System back here, you don't want the regulator back here telling you that the System can't take care of itself. And I think that that is unlikely because the System, in fact, has turned around and is very healthy today.
But, again, I want to go back to the point that these types of changes, you can't make them successfully when times are bad. You have to make this type of change when times are good. And so it is a pre-emptive effort on our part. There is a very, very important subsidiary benefit to this, and my colleague has mentioned it—and that is, it provides farmers and ranchers greater choice. And, in fact, from that standpoint, competition is good. Competition ensures that the lowest cost of credit is available to your constituents, consistent with the safe and sound lending practices. And so that is a benefit.
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And I would argue, beyond that, that when you take a look at public policy changes like this, you really have to look beyond and look through the changes at the association level or the arguments that are going back and forth in terms of the competitive environment between necessarily System associations and banks. You really need to ask yourself, how is this going to affect my constituents? How is it going to affect farmers and ranchers out there? Well, it is going to affect them positively because they are going to have greater choice of lenders and potentially lower costs of credit. And that is good. Farmers and ranchers—and I am sure you have heard it; I have heard it—their costs are going up. Fuel costs are going up. Fertilizer costs are going up. And credit is a cost too. So this helps, in a small way, but it helps.
Mr. MORAN. Mr. Chairman, when and how did this proposal originate? Has it been circulating through the System for a long time?
Mr. REYNA. The concern actually came up, as I mentioned, in the early 1990's, as a result of a Treasury report, but Moody's Investor Services also commented on the narrow geographic lending that the System does and the potential for concern. The Agency has debated this for a number of years.
Back in 1994, the Board that existed at that time, before my colleague and I were even on the Board, published a policy statement in the Federal Register seeking comment on the end of exclusive charters. Nothing came of that effort, but, more recently, the Agency has tackled it in a variety of ways—whether to do it by rule and remove portions of the existing regulations that relate to notice and comment in the regulations. It is a provision that allows for business to be conducted between districts. We had an opportunity to study that further based on comments. This approach, slightly different approach, in terms of issuing a national charter, but it gets to the same destination, which is removing the arbitrary nature of the regulations and the territorial constraints.
Mr. MORAN. Thank you, Mr. Reyna. Thank you, Mr. Chairman.
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Mr. LUCAS of Oklahoma. Mr. Condit.
Mr. CONDIT. Thank you, Mr. Chairman. And, Mr. Chairman, thanks for being here today. I really don't have any questions, except what has been passed to me by Mr. Stenholm, who had to leave to appear before the Rules Committee. So, for the record, you have answered, I think, part of these questions, but I want to ask them, and if you want to refer to your answer, that is fine. Mr. Chairman, in your opinion, what is the need for the national charters?
Mr. REYNA. Again, the need for the national charters and from a regulator standpoint is to help diversify the portfolios of System institutions. The proposal addresses that directly. It also has a subsidiary benefit for farmers and ranchers in that they will have greater choice of lenders available to them.
Mr. CONDIT. Thank you. Is there anything contained in the national charter's proposal rule that would expand the lending authority of farm credit institutions?
Mr. REYNA. No, sir. Not at all.
Mr. CONDIT. Thank you. Thank you, Mr. Chairman.
Mr. LUCAS of Oklahoma. The gentleman from Montana.
Mr. REHBERG. Thank you, Mr. Chairman. I apologize for some of the basic questions that I might have to ask. I don't have a lot of history with the Farm Credit System. Your Board of Directors is appointed by whom?
Mr. REYNA. We are nominated by the President and confirmed by the U.S. Senate.
Mr. REHBERG. Are all of the positions filled at this time?
Mr. REYNA. No, sir. They are not. We have one vacancy.
Mr. REHBERG. Out of how many? How many are on the Board?
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Mr. REYNA. Out of a three-member Board, one vacancy currently. And we serve 6-year terms, overlapping.
Mr. REHBERG. So there are two of you in place at this time.
Mr. REYNA. Yes, sir.
Mr. REHBERG. I have a little prior history of some of the regulations that were proposed within the last days of the last administration. Has the Bush administration had an opportunity to review this and make comment and approve this rule change?
Mr. REYNA. They have not formally commented on this particular rule. We did receive their memos from Andrew Card that requested that all independent agencies consider withdrawing regulations that might otherwise impose burdens or costs. We did meet on that issue and sought input from our staff. The direction of the regulation that we have that is out for comment now, in fact, reduces regulatory burden and, in fact, reduces costs. So I think it is absolutely consistent with the Bush administration's goals, as I read them and as I understand them, and, hence, for that reason, as well as for safety and soundness reasons, I see that it wouldn't be prudent to withdraw it at this time.
Mr. REHBERG. But your staff then recommended you not honor the voluntary request by the Bush administration not to move forward until they have had an opportunity to review the rule and make their recommendation.
Mr. REYNA. The staff appropriately raised it to the Board level and encouraged us to have a discussion about it to determine whether we wanted to move forward or not. And the determination was made that we should move forward. Again, the direction from the White House, as it relates to independent executive branch agencies, which we are, was a voluntary request, not a mandatory one. So we did our due diligence in discussing it, debating it, and concluded that we needed to move forward, at least to get it out for public comment. We could still not move forward if it seems prudent not to move forward, but it didn't seem to be wrong to solicit public input on an important issue like this.
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Mr. REHBERG. I would think, based upon your prior comment, that it is easier or better to have this kind of discussion when there isn't a crisis and you don't feel there is one at this time.
Mr. REYNA. Right.
Mr. REHBERG. I was expecting you were going to say there were 12 members of the Board of Directors and one or two vacancies. But when there is three Board members and one vacancy, one-third of the Board is not represented in light of the President's request to have an opportunity to at least review and make comment, it seems like a 30-day comment period is kind of an odd parameter or a guideline that—I don't understand what the hurry is.
Mr. REYNA. On one hand, I can certainly understand how it appears to be a short comment period, but this rule was substantially put out in the form of a booklet and published in the Register roughly 6 months ago without significant change. There have been some changes which I think tighten it up, but it is substantially the same as was published 6 months ago in which we got over 1,000 comments. It is really not a new issue and/or concept.
And, in fact, like I have said, it has been debated extensively since 1994, the concept, and the issue has existed for the last decade. So I can appreciate what you are saying. Certainly the administration can comment, and my guess is they probably have larger issues right now to worry about, but certainly we would welcome any input. And, as I have mentioned, we would seriously weigh and consider all comments.
I would note that we have a three-member Board with one vacancy, but we also have another split, and that is, I am a Democrat; my colleague is a Republican. So any rule that comes out of our Board has really got to be a bipartisan rule or it doesn't go anywhere.
Mr. REHBERG. OK. Thank you, Mr. Chairman.
Mr. LUCAS of Oklahoma. Mr. Dooley.
Mr. DOOLEY. Thank you, Mr. Reyna. It is good to see you again. My question goes to what prior questions were on why is there the need for this? And I understand the argument in terms of creating a greater diversification of the portfolio. But, as I understand it, your existing regulations allow for systems to enter into other regions with the concurrence of that System's approval.
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Mr. REYNA. Right.
Mr. DOOLEY. I be correct then in assuming that you need this rule so that you don't have to secure that System's approval to enter into providing services in that region?
Mr. REYNA. It seems to me that the rules are in place right now are a barrier to doing business. If you want to make a loan in my territory, ultimately the say as to whether you can do that or not. You have to notify me and I have to tell you, the other lender, yes, you can come into my territory. But how does that benefit the farmer? If there is a farmer in my territory that I don't want to serve, for whatever reason, they are basically being held hostage. If you can serve them—my feeling is that it removes that regulatory problem, the barrier, to serving the customer.
Mr. DOOLEY. What are the regulations that are in place now that address consolidation of adjoining areas? I mean, are you currently precluded from mergers and consolidation of various systems?
Mr. REYNA. No. In fact, the Farm Credit System is subject to the same pressures that commercial institutions suffer from, and consolidations and mergers have been occurring on—in both arenas. And our provisions of our statutes and regulations allow for mergers and consolidations, and, indeed, those have happened. I don't believe that this will speed up mergers and consolidations within the System. I know that has been suggested by some. I actually think this will enable smaller institutions, actually, to find a market and succeed, much like community banks have been able to.
Mr. DOOLEY. So within your System, it would seem, though, that some of the smaller institutions would feel very threatened by this because they no longer have a regulatory impediment to larger systems entering into their marketplace. Now, is there not significant opposition within the System?
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Mr. REYNA. Two things. There is not complete agreement within the System on this particular proposal. The particular proposal does not require any institution to apply for or receive a national charter. It is up to their Board of Directors that are elected by their members. So it is a business decision that they ultimately have to make, and a competitive one, a strategic decision that they have to make. And it is true that if this goes forward, there would no longer be exclusive regulatory territories that they could operate in. And it is true that probably some institutions that have enjoyed an exclusive territory might feel threatened if they don't have that exclusive territory.
But, again, in judging the public policy impact of that, I think you need to look beyond that to see the impact on the consumer, the borrower, which is more choice and potentially better rates and terms for their loans. And so that is the standard which I would use. The back and forth, again, between System institutions, between the System and commercial banks, is interesting, but ultimately we ought to judge our policies based upon the impact on people and, in this case, farmers and ranchers.
Mr. DOOLEY. With your special GSE status, one of the results of this policy would be that you are actually going to increase more competition within the Farm Credit System and that that competition, in fact, could lead to benefits to farmers by lower interest rates. But also, how do we have the same systems in place that are going to maintain the same safety and soundness of the System?
Mr. REYNA. Well, we have a very talented team of examiners that are in those institutions every 12 to 18 months, depending upon their condition. I think we have got the necessary staff and rules and regulations to protect safety and soundness of those institutions. There is not on the commercial side, there is no guarantee of success. There is no guarantee of success within the Farm Credit System of a given institution. The Boards of Directors have got to be accountable for their decisions. And we will be there as a regulator to ensure that corrective action is taken, if necessary, to ensure that a dependable source of credit, System-wide, continues.
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Mr. DOOLEY. Is there some concern that, with the special status you have as a GSE, and that if you move forward and you look down the road 10 years and you have one region or one bank within the System that is now offering loans over a good part of the country, that you really lose your identity of filling a particular niche and the System begins to look very much like a commercial bank and some of us then begin to question whether or not you deserve to have that special status that is providing, I don't know, upwards of a billion dollars a year and some level of subsidization?
Mr. REYNA. Let me try to answer this. Much has been made about competitive differences between commercial banks and the Farm Credit System. Commercial banks have a wide array of products and services that they can offer that the System cannot. The System is competitive on a price basis, but not really on a product basis and services basis, certainly not after financial modernization. The role of a GSE in the marketplace is to improve the efficiencies in the marketplace to spur competition and not to be necessarily the dominant player in the market, and the System is not the dominant player in the market. But it is to ensure that there is a dependable source of credit when maybe the commercial lenders might not be there or be there in sufficient numbers to serve the territory.
Mr. DOOLEY. Thank you very much.
Mr. LUCAS of Oklahoma. Mr. Osborne.
Mr. OSBORNE. Thank you for being here. I just want to ask you a couple of things. I think previously it has been alluded to the fact that you are a Government-sponsored enterprise and have certain advantages, possibly, in the taxation area and also accessibility to loans or to money. And you mentioned that the thing that you are trying to do is to serve farmers and ranchers, and I think that is laudable. I agree with that and appreciate it, and I am also somewhat interested in a level playing field. And so I am assuming that the reason that you have been organized is to possibly assume some risk, to take some loans that commercial banks would not take. Is that correct?
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Mr. REYNA. That is commonly stated, but the act requires lenders to provide credit to all eligible borrowers that have a basis for credit. So, in essence, all types of agricultural producers and sizes of agricultural producers. USDA, as you well know, has got targeted programs to limited-resource farmers, socially disadvantaged farmers. There is no specific mandate in that area under the Farm Credit Act. There is congressional mandate to serve young, beginning, and small farmers and we, in fact, examined for that, and I think the System's record on that is pretty good.
Mr. OSBORNE. So, in other words, you are saying that essentially, in terms of requirements for loans, stability, equity, there is little difference between what you are providing and commercial banks.
Mr. REYNA. The System, again, can serve small-, medium-sized, large agricultural producers, and others, as the commercial lenders can. The notable exception in the act is a higher standard, to say that the System shall make, in essence, every effort to serve young, beginning, and small, but they are not limited to serving young, beginning, and small farmers.
Mr. OSBORNE. I understand. But what it seems to me is that if you are going to be given some advantages, then inherent in those advantages would be the idea that you would be serving some folks. And I realize you are talking about young, beginning farmers, but if those people are people that a commercial lender would also loan to a bank, then I have a hard time understanding why you are given the advantages that you are given. It seems to me that there has got to be a niche between FSA commercial banks that you guys fill? And am I mistaken in that assumption?
Mr. REYNA. I think that the System serves ostensibly the same market that a commercial lender would serve so that there isn't a separate niche.
Mr. OSBORNE. I understand that. The concern would be, well, do we have a level playing field in that you have been given some advantages being a Government-sponsored enterprise? A couple of other questions. Is there unanimity within your organization as to the charter? In other words, is this pretty much an across-the-board, 100-percent agreement, or are there some within Farm Credit that are not that excited about the proposal?
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Mr. REYNA. Just as a point of clarification, the Board that my colleague and I sit on, is an independent Board regulated much like the FDIC or the OCC or any other financial regulator that we have got now. But the System that we oversee is not necessarily unanimous in its support. I will say that about 97 percent of these eligible institutions have indicated an interest in applying for a national charter. Some have done that because they see advantages. Some have done it because maybe they feel threatened and they feel like they, too, need to have equal authority and the potential to go outside. But we will find out. The comment period is open and people will have an opportunity once again to state their concerns, make recommendations to the Board, before we take any final action on it.
Mr. OSBORNE. OK. And one last question. And that is, that I do understand that there is some possibility of lending across borderlines by consent, and we have talked about that previously. And I wondered if you would say a little bit more about that. If that is a feasible option, do you need the law that you are now proposing? Do you need a change?
Mr. REYNA. There is no one specific answer. Sometimes consent is given; sometimes consent is not given, to enter into a particular area. Sometimes the rationale for not giving it is good and sometimes it is not. And the sum total is, in my opinion, an unnecessary burden, regulatory burden, that we have imposed. It is certainly a mechanism to get consent, but I am not sure what the original rationale was and it certainly doesn't seem to make much sense to me today.
Mr. OSBORNE. Thank you.
Mr. LUCAS of Oklahoma. Mrs. Clayton.
Mrs. CLAYTON. Thank you, Mr. Chairman. Since I have been in the Congress I have learned a lot about Farm Credit, and I have probably missed some in my learning. But one of the assumptions I thought I understood was in direct contrast with what you just said. I thought Farm Credit service was really brought about as the result of their being a void in credit availability in the agriculture community. Because I can't understand why the Government would be engaged in it, in the first place, unless there was a void, because we shouldn't be competing with the private sector. I misinterpret what your last response to——
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Mr. REYNA. What I can tell you, in taking a look at the Farm Credit System history, in 1916, when it was originally signed into or was created by Executive order, by Woodrow Wilson, there was a market failure by banks to make long-term loans to farmers.
And that is, indeed, what brought about the System. But the System exists today and the act has been modified and ratified many times by Congress. And I would defer to the wisdom of this institution as to whether the Farm Credit System should exist. I should assume it should exist and I am here to protect it and to protect its safety and soundness until the institution otherwise tells me not to.
Mrs. CLAYTON. Right. Well, it certainly has served our farmers in areas that I know, I think, reasonably well, and those that I am most familiar with have felt that they were providing a valuable service, in some instances, the easing collaboration or supplement of what has happened in commercial farming. And I have known also, in some instances, where I know I was engaged trying to expand farm service of being able to do more in rural areas because I saw that as an extra tool to enhance rural development, particularly in the housing. Now, my bankers didn't quite like that, but I thought there was an opportunity for you to get in and gauge where the bankers, perhaps, wouldn't go.
But I always saw your mission and the reason the Government would be subsidizing is that you were fulfilling a niche that the marketplace was not serving or was not prepared to serve or wasn't interested in serving. And it didn't mean that your underwriting criterias wouldn't be lax. It simply meant that you understood your mission and you were created because there was a void. The market system wasn't providing sufficient long-term credit or credit to farmers. And over the years, I am sure it has been changed and made more modern. But I don't know if the mission has changed. Did the mission change since this original——
Mr. REYNA. I would have to go back and take a look specifically. But what I do know is the System was created not only for the reason that you have just described, but the preamble to the act does clearly state that part of the mission of the System is to improve the income and well-being of farmers and ranchers. So cooperatives are a way to do that. And to the extent that farmers and ranchers who own these cooperatives benefit from the existence of the System, then that improves the income and the well-being of the farmers.
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Mrs. CLAYTON. In fact, I would support the self-development and earning of cooperatives. Let me just ask you about the concern I have about this particular rule. My understanding of the underwriting criteria and your ratio of loan portfolio to debt and all of those—and assets—are in fairly good shape. In fact, your portfolio looks pretty good. Is that right?
Mr. REYNA. Overall, the health of the System is very good, very strong.
Mrs. CLAYTON. So there isn't an impending need internally to go to a structure, to put you in a more secure position financially. Right?
Mr. REYNA. There is no safety and soundness current concern today. That is correct. But this rule would have prospective benefits.
Mrs. CLAYTON. And the prospective benefits would make you more competitive or more fiscally sound?
Mr. REYNA. It certainly would make the System more competitive and, I would argue, safer and sounder going forward. Certainly the financial marketplace, let alone the agriculture marketplace, but the financial marketplace has changed dramatically. And to the extent that we can remove barriers and enable the borrower-elected Boards of Directors make their business decisions, that seems to me to be a good thing.
Mrs. CLAYTON. Did I understand you, all the banks and associations would not necessarily be affected if this rule went into place—people have the election if they find out it is more feasible for them to stay independent?
Mr. REYNA. That would be a decision that is made by a local Board of Directors as to whether they would apply for a national charter. That is correct.
Mrs. CLAYTON. Yes. What I foresee the possibility is that because the vertical integration gives you economies of scale, rather it is now elective and not mandated, it becomes a nondecision once the economies of scales start knocking in, and, therefore, the smaller groups will not be able to compete and provide this service. Can you disamuse me of that notion why I think that you would have created such vertical integration that you would have choked out some of the systems within your own System?
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Mr. REYNA. I think you only need to look so far as your local community bank. The Wells Fargos and Chase and Bank of America have not run the local community banks out of business. And I don't think that the——
Mrs. CLAYTON. Well, I don't know where you live, but I know in North Carolina, I can count—in fact, I used to be on a board because that bank is still in existence. But I can tell you, without any shadow of a doubt, we are very much into the banking business in North Carolina and many of the banks that were there are not there. Now, I do see some coming out, as, indeed, they are buying and merging where there is overlap, that gives some opportunity for others. So I wouldn't look for that as to give me confidence, because I happen to have too much experience the other way.
I want to have you to have the option to go forward, but I don't want to see you moving in such way that I don't perceive there aren't some bumps in the road for those smaller entities. I think the Farm Credit Systems in North Carolina, particularly the one in eastern North Carolina, are doing very well. They may want to be a part of it. They may see advantage of that. But there may not be advantages for them or for someone else, for that matter. And the System ought to be moving in such a way that it doesn't move out options for people.
And particularly when you say there is no underwriting criteria giving an emergency for that. And I do know there is need for long-term credit. Some of these banks for farmers and some of this is farmers say they need to renegotiate their long-term credit in order to stay afloat. But I haven't heard the commercial banks are beginning to pull back. I do correct myself. Because I know—and Mr. Baca and some of the retrofitting, they are.
Now, I don't know what you are doing, but I know in North Carolina, Farm Credit has not said they are unable to meet loans, but there are some troubling farmers who have problems out there. And I just wonder when you move to such an—if you are moving for efficiency and you move to such a rapid pace, you will have that underwriting criteria that says to that farmer who had some troubling loans and renegotiation, that for other reasons, you are going to have to not consider the loan. My concern is that if you try to mirror the commercial banks in every step of the way, I wonder why there is a need for the farm service credit. And that is my concern.
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Mr. LUCAS of Oklahoma. The gentlelady's additional time has expired.
Mrs. CLAYTON. Thank you.
Mr. LUCAS of Oklahoma. Mr. Simpson.
Mr. SIMPSON. Thank you, Mr. Chairman. My questions are similar to that which were just expressed. If the purpose of going to a national charter as diversification of your portfolio to make it more competitive and so forth, why not diversify all the way and have commercial banks do it?
Mr. REYNA. Well, that is a decision that this body needs to make.
Mr. SIMPSON. Ah. Now, we are getting somewhere. The other thing that would cause me some concern, were just expressed by Mrs. Clayton. And that is, that if the purpose of this was originally to fill a niche that an unmet need, lack of available credit, or whatever, and currently we have these associations that operate within prescribed territories, and now, we go to a national association—what is to prevent that—or that national charter, that one that has a national charter, or three or four, or however many given, to go into certain areas, cherry-pick the best customers off, leaving what is left there and the inability of that other entity that was serving that Local Service Area to actually go out of business and create, again, an unmet need?
Mr. REYNA. What I would say is that is competition is a contact sport, and what you described is an accurate description of a competitive environment. And if an institution makes poor decisions, then it should go out of business. And so, as a regulator, we need to ensure that the overall System itself stays safe and sound and healthy. Our rule would ensure that—and the way that the System operates would ensure that every square inch of the country will continue to be served even if a single institution goes out of business.
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Mr. SIMPSON. Well, I assume that that a portfolio of one of these associations or so includes good risks, high risks, low risks, medium risks, whatever. And all of a sudden you take the good risks out of there from a national association and you are—I mean, what is the choice that that Local Service Area is going to have? It is not that they have made bad decisions. It is that they have their best customers that would lower their overall risk taken away from them essentially with a national charter. And I am assuming when you talk about competition being a contact sport, that is true in the private sector, but not necessarily in the Government sector. And by that I mean, in the Government sector you were there to fill a niche. If you weren't there to fill a niche, why would we have you? Is there a question in there?
Mr. REYNA. I am looking for it. I am looking for it. I do think that the System, as a GSE, plays a vital role in ensuring the competitive marketplace and ensuring that your farmers and ranchers in your area get the lowest possible rates that they can, consistent with sound lending practices. So competition helps squeeze out inefficiencies in the marketplace. And inefficiencies, in essence, are going to be those higher rates that your constituents are currently paying. I want your constituents to pay lower rates, consistent with safe and sound lending practices.
Mr. SIMPSON. I do too, but I am afraid that they are not going to is the problem. Is that there is going to be some people that are unable to get it because they will be left out because the Local Service Area won't be there anymore—the local association won't be there anymore and you will have the national association which may take some and may not take some.
Mr. REYNA. The System has a mandate to serve farmers and ranchers. Commercial banks don't have that same direct congressional mandate to serve. So we are here to ensure that they are not only safe and sound, but they are meeting their congressional mandates. So we are going to make sure that Farm Credit System continues to serve your area, as well as other areas.
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Mr. SIMPSON. Is there any requirement in this that if a national association came in and essentially what I call cherry-pick the good customers off, consequently the local association would have a tough time staying in business that the national association, if the local association went out of business, the national association would have to pick up those customers?
Mr. REYNA. We will make sure that every part of the United States is continued to be served by the Farm Credit institution. It is true that a larger association, maybe one that is more efficiently run, could come in and—and because its costs our lower, provide a lower cost of credit—its operating costs are lower. But it is going to be a cost if they go too far. I mean, they have got infrastructure that is set up. There is going to be natural limiting factors for associations to operate. Even if they have a hunting license, like a national charter, it is going to be hard because they are going be adding not only revenue from those presumably loans that they pick up, they are going to be adding costs to go out and service those loans, as well as to make the loans.
So I don't see broad, expansive use of the authority immediately. I think it will occur in an evolutionary fashion over time. And during that evolutionary time, associations should have an ability to modify their operating procedures and their strategies to better compete. So I hear the concerns, but again, I think that that will be mitigated, to a large degree, because you are not only adding revenue, you are adding costs when you are going outside your territory.
Mr. SIMPSON. Thank you, Mr. Chairman.
Mr. LUCAS of Oklahoma. The gentleman's time is expired. Mr. Thune.
Mr. THUNE. Thank you, Mr. Chairman. And thank you, Mr. Reyna, and, Ms. Jorgensen, for being with us today. Just a couple of questions. One has to do with the fact that agricultural lending tends to be fairly specialized and practices can vary significantly from one region of the country to another region of the country. Obviously, the needs of South Dakota farmers are somewhat different than those of those who grow fruit or California and Florida and other places like that. Would you agree that extensive knowledge of a region in which a System institution is lending is of critical importance?
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Mr. REYNA. Knowledge of a region and of the commodities that are being loaned upon is important. The more extensive, the better.
Mr. THUNE. The question I would have as a follow-up to that is, if the national charters are implemented, how do the Farm Credit associations that are locally owned and operated by producers who are familiar with the operations and relative credit risks of area borrowers how do you overcome the regional differences? Farm credit institutions, generally, are very reflective of particular lending practices and are representative of the borrowers that they represent. How would you go about balance then under a national charter system?
Mr. REYNA. Fortunately, the rule envisions a detailed business plan and to include strategies, again, goals and objectives. And we are going to have to take a look—our examination team—certainly this Board, I am sure, will rely on our examination team to review those business plans and to provide input and insight to us before we rule on any national charter for an association to ensure that they have the capacity to do what they would like to do, that they envision doing. And if they don't, then we may have to provide a more restrictive charter, rather than a national charter. But, again, I don't want to prejudge any particular application or anything, but we will be looking to see that they have the wherewithal and the capacity to serve the territory that they envision serving.
Mr. THUNE. Does your rule provide that—for approval from the farmer and rancher, owners of Farm Credit associations, or is it just associations' Board of Directors, your body?
Mr. REYNA. Well, it is two steps. It doesn't even get to our Board for consideration unless their application is approved at the bank level or association level, in essence. Those members on that Board are elected by their peers. So much like any Board, if they are out of step with their owner-borrowers, they won't be Board members for very long. So our assumption, and I don't think it is a big assumption—our assumption is that the Board of Directors of an association would not move forward on an application for a national charter unless they had the support of their member borrowers to do it.
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Mr. THUNE. There is no provision that would allow for any sort of referral directly to the members, but it would be the Boards that——
Mr. REYNA. It would be the Boards, although there is nothing precluding or preventing a Board of Directors to say, let us do a straw poll to see what our membership wants us to do. So they could do that.
Mr. THUNE. Do you have any sense of where the individual farmer producers are on this proposal? And obviously you know from an institutional standpoint where the members of your organization are. It sounds like you have tested that pretty well. But farmers, have they weighed in on this at all, individual borrowers?
Mr. REYNA. We have had the publication of the rule in a booklet form generated over a thousand comments from a wide variety of sources, including commercial banks, as well as System institutions, employees of System institutions, and farmers and ranchers, as well. I don't have those with me today, but they are a part of the public record.
Mr. THUNE. But out of the number of comments that you receive, the farmers and ranchers were represented in that group.
Mr. REYNA. They were represented.
Mr. THUNE. Do you see any implementation of this rule creating a disruption in rural credit markets?
Mr. REYNA. It will result in a change. I don't believe that that change will be negative. I don't know that I would consider or characterize it as significant as a disruption, but it would be a change. The associations are going to have to revise their business plans. They are going to revise their strategies. They are going to have make sure that they need or that they have the right knowledgeable loan officers, trained loan officers. That is what I would offer.
Mr. THUNE. The bottom line in my mind on all this is going to be, because of why the Farm Credit System was originally created. And that is to fill sort of credit voids—is ultimately—it would seem to me that a proposal like this ought to be based upon how does it impact the individual borrowers, farmers and ranchers who are the members. In the comment period, it sounds like you received some of those, but it seemed to me that would be an important aspect in moving forward with this. Because I think that was when, at least to the degree that Congress has been involved in this, it has always been with respect to how do we provide better credit, more accessible credit in rural areas of the country.
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Mr. LUCAS of Oklahoma. The gentleman's time has expired.
Mr. THUNE. Thank you, Mr. Chairman.
Mr. LUCAS of Oklahoma. Mr. Pickering.
Mr. PICKERING. Thank you, Mr. Chairman. And I appreciate you having this hearing today. Mr. Reyna, if you could, please comment on the dispute that I am sure you are familiar with—the States of Mississippi, Louisiana, and Alabama, between the Texas Farm Credit Bank and the First South Ag Credit Association. And we would all hope to see a peaceful resolution of the differences they have between short and long-term capabilities and their loans. Do you have an opinion as to what should or could be done in that regard?
Mr. REYNA. Well, I have a couple of comments. Fortunately, from my view, this rule before the Board, and that is out for public comment, doesn't touch that issue, doesn't change the dynamics that exist down there. For the benefit of the members of the committee, the statute provides for some territories of the United States, and the States of Alabama, Louisiana, Mississippi, New Mexico, that are protected by statute. They are given exclusive territories, cannot be overchartered.
And all I could say is that there have been smarter people than me that have tried to solve that problem and have been unable to. It is not because, in my opinion, a lack of goodwill on any side. The issues are very, very difficult. And what I have encouraged people to do is to continue talking to try to find a resolution to that, but potentially a resolution would be congressional action if the parties cannot come to grips with a solution themselves.
Mr. PICKERING. Have you made any recommendation to any of the parties or are you familiar with any of those smart people that you have mentioned who have made any recommendations in the past? What options are you familiar with if Congress were to consider anything, what options would we, or should we, consider?
Mr. REYNA. I wouldn't be prepared today with any specific recommendations for you. What I will say is that, again, the issues run very deep between the parties. There have been discussions that include compensation that goes to one party or another in order to relinquish the exclusive territorial and lending rights to that area. There have been detailed discussions about mechanisms to enable that to happen. But, again, there is strong feelings on all sides of the issue.
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Mr. PICKERING. Mr. Chairman, thank you. Thank you, Mr. Reyna.
Mr. LUCAS of Oklahoma. Thank you, Mr. Pickering. Mr. Ose, do you have questions? That is an inspired posture to be in, Mr. Ose. With that, the committee would like to thank the panel for your willingness to come before us today and to answer many questions from many perspectives. As I made clear in my opening statement, this is just the beginning of our review and our look at the availability in the future of agricultural credit in this country. Thank you.
Mr. REYNA. Mr. Chairman, thank you.
Mr. LUCAS of Oklahoma. And now, we would like to invite our second and final panel of witnesses to the table. Thank you, for coming today, gentlemen. Mr. Jerold Harris is president and CEO of the Farm Credit Bank of Wichita, from Wichita, KS, and is also representing the Farm Credit Council. Mr. Philip Burns, chairman and CEO of the Farmers and Merchants National Bank from West Point, NE, who is also representing the American Bankers Association. And Mr. John Dean, chairman and CEO of the Glenwood State Bank from Glenwood, IA, who is also representing the Independent Community Bankers of America. Mr. Harris, please begin when you are ready.
STATEMENT OF JEROLD L. HARRIS, PRESIDENT AND CEO, FARM CREDIT BANK OF WICHITA, WICHITA, KS, REPRESENTING THE FARM CREDIT COUNCIL
Mr. HARRIS. Thank you, Mr. Chairman, and good afternoon, and, members of the committee. My name is Jerold Harris. I am president and chief executive officer of the Farm Credit Bank of Wichita. I am appearing today on behalf of the Farm Credit Council, the national trade association representing the institutions of the Farm Credit System.
The Farm Credit Bank of Wichita provides wholesale funding and services to 26 local Farm Credit lending associations in Kansas, Oklahoma, Colorado, and New Mexico. We and our associations provide loans and related services to some 43,000 agricultural producers, rural residents, and agricultural businesses in these four States. The bank and its related associations are cooperatives, owned and governed by the farmers they serve. At year-end, we had nearly $5 billion invested in agriculture and rural communities.
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Mr. Chairman, before I address the subject of this hearing, I want to thank you and your fellow members of the House Agricultural Committee for the support you all have demonstrated for American agriculture over the past several years. Without your continuing support, conditions the rural economy would be dire. The additional assistance provided by Congress during this period has meant the difference between solvency and bankruptcy for many producers. We heartily support the assistance you have provided and urge you to continue to address the needs of agriculture while markets remain depressed.
We welcome the opportunity to come before the committee and talk about what we are doing to fulfill our mission to serve farmers and ranchers. To accomplish our mission, we are expected to keep Farm Credit institutions modern, efficient, and competitive. We are expected to provide farmers and ranchers a choice amongst lenders and we are expected to have the wherewithal to be a reliable source of credit, able to serve all types of farmers in good times and bad.
The current service territory limitations under which Farm Credit associations operate date back to the 1920's. Back then, a farmer's geographic location, where they lived and farmed, was the determining factor in their choice of a lending institution. Needless to say, 80 years has brought a lot of changes to agriculture and to the financial services industry.
Today, farmers buy inputs from, gather information from, and market their products to entities all over the globe. The Internet provides instantaneous access to a global marketplace. Globalization has brought with it the promise of expanded markets and the challenge of global competition. And, yet, the farmer-owners of the Farm Credit System have seen their lending institutions remain geographically challenged in a global economy that knows no geographical limitations. At a time when the Internet has wiped out boundaries and borders, farmers still face geographic hurdles if they want to access financing from a Farm Credit institution other than the one that is specifically authorized to serve their location. These arbitrary and outdated restrictions no longer make sense in our modern world.
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To their credit, the Farm Credit Administration recognized this situation and came to the conclusion that it is time to reverse the administrative decision, made some 80 years ago, that confines System institutions to specific geographic boundaries. FCA's proposed regulations allow national charters will provide farmers and ranchers with the opportunity to choose the institution that best meets their credit needs. We strongly support the Agency's proposal.
The Farm Credit Act provides FCA the responsibility and authority to grant and amend charters for Farm Credit institutions. As a part of its comments to the FCA on the national charter's booklet, the Farm Credit Council sought and obtained a legal analysis of the Agency's authority to issue national charters. We would be happy to make that available to the committee for your consideration.
Modern agriculture has grown more complex and specialized. So, too, have the financial institutions that serve it. Building the expertise to serve these varying agricultural enterprises is the challenge facing all agricultural lenders today. Farmers and agricultural businesses fighting to innovate and succeed cannot afford to be stuck with a lender ill-equipped to help them win that fight.
Farm Credit institutions have few alternatives today as they work to build the capacity to serve evolving agriculture. Tied to a specific geographic territory, these institutions are forced to merge with others in order to stay competitive. Mergers, however, limit farmers' choices. National charters are an alternative to mergers, offering Farm Credit institutions the opportunity to build capacity to serve without merging.
As essentially single-sector lenders, Farm Credit institutions face concentration risks associated with agriculture. This risk is further concentrated, in many cases, by geographic risk. An institution can find itself facing a territory-wide drought or similar agricultural catastrophe. By moving beyond local geography, Farm Credit institutions can alleviate some of this geographic risk.
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We recognize that extending loans in unfamiliar territory can pose risks as well. However, management, strong regulatory oversight, and the benefits of geographic diversification, more than offset those risks.
National charters will not change the cooperative nature of Farm Credit institutions. They will continue to operate on the concept of one stockholder, one vote. Farm Credit institutions will continue to be owned and controlled by the members/customers. Farmer control will remain a fundamental principle of Farm Credit.
An institution that receives a national charter would be required to amend its current business plan to ensure that, first and foremost, it serves the loans and financially related needs of the customers in its Local Service Area. Mr. Chairman Reyna talked about that at some extent.
Today, System institutions serve many diverse entities that comprise U.S. agriculture, including larger-sized farmers and smaller farm operators, and everything in between. Farm Credit will continue to be responsive to the credit needs of all types of agricultural producers, just as we are doing today.
National charters will not change the eligibility to get a loan from Farm Credit. The national charter regulation will provide no new lending authority for Farm Credit institutions. The competitive balance between Farm Credit and commercial banks will not be altered by this regulation.
Mr. Chairman, thank you for the opportunity to testify today. And we strongly support the FCA's proposed regulation, because, in summary, we believe it provides more choices for the farmers and ranchers. It will help diversify risk in Farm Credit institutions and it will help preserve Farm Credit's cooperative structure. Importantly to note is the fact that it will not alter the competitive balance between Farm Credit and commercial banks and it is fully authorized by law. I would be pleased to respond to any questions, Mr. Chairman.
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[The prepared statement of Mr. Harris appears at the conclusion of the hearing.]
Mr. LUCAS of Oklahoma. Thank you, Mr. Harris. Mr. Burns.
STATEMENT OF PHILIP BURNS, CHAIRMAN AND CEO, FARMERS AND MERCHANTS NATIONAL BANK, WEST POINT, NE, REPRESENTING THE AMERICAN BANKERS ASSOCIATION
Mr. BURNS. Thank you, Mr. Chairman, and, members of the committee. I am Phil Burns, chairman of the Farmers and Merchants Bank in West Point, NE, and I appear today on behalf of the American Bankers Association. We thank the committee for holding this hearing concerning this important proposal by the Farm Credit Administration because it represents a dramatic departure from the way in which the Farm Credit System has operated for over 80 years. We urge Congress to stop FCA from moving with this proposal.
My written statement discusses how national how the national charter proposal will be destructive for banks and rural communities. Chairman Reyna, a few minutes ago, made a comment to the effect that, well this proposal shouldn't be looked at from the perspective of the Farm Credit System, nor that of necessarily commercial banks, but it should be looked at from the standpoint of rural borrowers. I could not agree more. And so I would like to take the opportunity today to visit with you about why I believe national charters are likely to harm American's farmers and ranchers.
FCA would have Congress and the public believe that System institutions are shackled to an antiquated system of geographic territories. The truth is, there is no farmer or rancher in American being denied his or her choice of a Farm Credit System lender due to defined territories. And, as has been indicated earlier, all a System has to do to enter a new territory is get permission from the System institution that serves that territory.
National charters will, for the first time, have System institutions competing with each other. The System would have you and the public believe that if Farm Credit System lenders are able to compete with each other, they will be able to offer producers lower cost credit. However, they fail to disclose what effect an internal price war will have on the stability of the System.
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Not all Farm Credit System lenders want to engage in extraterritorial lending. FCA clearly acknowledges this fact and, yet, is willing to endanger these associations by allowing larger, more aggressive associations to come into their service areas to compete for business. Large, well-capitalized farmers and ranchers may, in fact, benefit from this competition. But what happens to small family farmers if their local association is forced to merge or is forced to go out of business?
We believe that this proposal will harm farmers and ranchers in the following ways. First, we are concerned about the negative impact national charters will have on small, beginning, and economically disadvantaged family farmers as System institutions seek larger, more profitable loans at the expense of these producers. This proposal will fundamentally change Farm Credit System institutions from cooperatives that are controlled by local borrowers, as was envisioned by Congress, into a few national lenders that have no local perspective and with no statutory or regulatory requirement to make services available to all family farmers and ranchers. National charters will allow surviving Farm Credit System institutions to pick and choose where they want to do business, but, more importantly, where they no longer wish to lend.
Second, the Farm Credit Administration proposes no specific enforceable or measurable regulatory sanctions that would ensure that local farmers and ranchers continue to have access to a Farm Credit System lender. In fact, they do not propose to restrict, in any way, nonlocal lending by System institutions. Specific and measurable limitations should be applied to a System institution's lending activities outside of their Local Service Area.
Third, the Farm Credit Administration fails to establish a case for how national charters will alleviate the System's concentration in lending to a specific commodity. Instead of more diversity and commodity lending, the result will be a continued focus on the same commodities, but in other geographic areas, and will, in fact, increase concentration in the single commodity loan risk.
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Finally, what do the 425,000 owner-borrowers of the Farm Credit System think about national charters? The democratic participation of local farmer and rancher borrowers and the management control and ownership of the System has always been central to its mission. The FCA is prohibited from granting national charters to certain associations that operate in four States without shareholder consent. Congress should mandate that all owners of the Farm Credit System be given the opportunity to vote on this massive change in structure.
The Farm Credit System was created at a time when there were limited choices to secure credit for American agriculture. Most banks were prohibited from lending on farm real estate in 1916. Today, seed companies, equipment manufacturers, fertilizer producers, life insurance companies, and foreign banks are all aggressive providers of agricultural credit. The fact that these options exist, raises the question, why should the American public remain on the hook for the reckless activities of a retail-lending, tax-advantaged GSE that has clearly targeted its lending to benefit large, wealthy farmers and ranchers?
In closing, we agree with the FCA that the world has changed much since 1916. The FCA and the System institutions that support this proposal are trying to convince you and the public that removing defined geographic territories will allow them to better serve agriculture. We disagree. National charters will fundamentally alter the Farm Credit System. If allowed to go forward, the System will soon be unrecognizable to you and the family farmers. It will consolidate and focus its lending on ever-larger operations and these large operators, not family farmers, will benefit from the $1 billion tax subsidy that the Farm Credit System receives by virtue of its GSE status.
By carefully examining the policy and business implications of this proposal, you have the opportunity to ensure that the Farm Credit System remains true to the mission established for it by Congress and remain true to the people the System was created to serve, America's farmers and our ranchers. Given the track record of their unsafe and unsound lending in the past, and the lack of enforcement on the part of the regulator, we would urge Congress to stop this process before it is too late.
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I appreciate the opportunity to be here and would be more than happy to address questions at the appropriate time.
[The prepared statement of Mr. Burns appears at the conclusion of the hearing.]
Mr. LUCAS of Oklahoma. Thank you, Mr. Burns. Mr. Dean.
STATEMENT OF JOHN DEAN, CHAIRMAN AND CEO, GLENWOOD STATE BANK, GLENWOOD, IOWA, REPRESENTING THE INDEPENDENT COMMUNITY BANKERS OF AMERICA
Mr. DEAN. Mr. Chairman, I appreciate the chance to bring an opinion from rural America. I am John Dean from Glenwood, IA, a town of 4,000 people and a county of 12,000 people, corn, beans, hogs, and cattle. I am here as a member of the ICBA, an organization of 5,500 banks that include the vast majority of the rural banks.
Today, we are discussing change and focus of the Farm Credit System. As public policy, should Government entities with Government-sponsored tax and financial preferences that were set up to fill a void, be permitted to expand helter-skelter where there is no void? I would refer you to Undersecretary of Treasurer, and I presume the Treasurer has no vested interest, where they say—and I quote—''Such policy raises serious question about the proper mission of the System.''
Risk to the taxpayer. It was not long ago that Brent Beasley was testifying at a congressional hearing begging for a $4 billion bailout. Now, this is a bailout for a system that purported to be the experts in farm lending. They recruited and trained their people to be the high priests in Ag lending. By comparison, in Iowa, we had 620 banks and, with the nature of the State of Iowa, the vast majority of these banks were concentrated in Ag, and I think we had 15 small banks that closed, a maybe just as better, if not better record, than the Farm Credit System.
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One of the causes, from where I stood, was the Farm Credit System's constant push for mega growth. As a matter of public policy, is this a burden on which we further want to risk the taxpayer?
Congressman Leach asked, will large business, with the capacity to tap the private credit market, find it to their, but not the public's, interest, to finance with these new Farm Credit industries? Treasury testified, these are not just another competitor. They are a lender to which the Government, that is you guys, has given significant competitive advantages. Furthermore, we have not even mentioned the lack of taxes that may be paid by private lenders that would be pushed out by this.
Now, to touch on need. I know the System talks about their need of diversification, but I think there are many ways for them to do that if, in fact, there is a need. I would rather discuss the other need, the consumer need. In my prepared statement, I have quoted umpteen statements from associations for the Farm Credit System. They raise fears of safety and soundness. They raise fears this will negate the small farmer to the back burner. They raise fears that this will raise rates to the small farmer. They also raise the fear, as is stated in the musical, TheMusic Man, you got to know the territory. They fear that they will be cannibalized.
To quote one association, ''That more than a majority of the associations are opposed to the national charter approach.'' I would urge the committee to read the accumulation of dissent from the people that deal day to day with the dirt farmer. We see no ground swell of associations asking for a change. We see no ground swell of farmers asking for a change. We see no ground swell of rural communities asking for a change. Is there a shortage of lenders? Is there this void lenders and Congress selected the Farm Credit System to fill? How did they do in the 1980's during the farm crisis? Most farmers say that in the hard times and the bad times in the 1980's, it would be easier to get eggs from a rooster than a loan from the System. So much for voids.
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But let us look to today. The USDA says, ''The farm sector appears to be well-served by a combination of private institutions and the GSE. Studies are well and good, but let us look at some actual things. Hall County, NE—I think, Congressman Osborne knows where that is. The Bankers Association tells me Hall County has 50,000 people, more or less, and that they have 19 or 20 lenders lending to either agriculture or agriculture-related people. That is one for every 2,500 people.
How about Decatur County? That is where Congressman Boswell is from. That is 7,500 people. He has three lenders in the county, again, for every 2,500 people. I come from Mills County, a small town, and we have one bank for every 1,500 people, primarily agriculture. Mills County has one bank for every 2,600 people, primarily the agriculture.
Now, let us look at the metropolitan area. Polk County—that is Des Moines—has one bank for every 13,000 people. Douglas County—that is Omaha—has one bank for every 16,000 people. I would suggest that the metropolitan areas have five or six times less competition than the rural areas. This would indicate that the rural counties, there is an oversupply of lenders, maybe dangerously so. Perhaps the Farm Credit System should be looking at only areas of over a million people.
Economy of scales are often discussed. Two years ago, the Chicago Fed had a conference and one of the topics was the stampede of mega banks to merge with other mega banks. There is a great deal of evidence to show that almost no cost or service advantage to the customers were brought about by these mergers. Last year, a fed study showed that the charges and rates are almost always lower at the smaller institutions. So what fuels this merger mania? The papers presented at the fed studies show that benefits go not to the consumer; they go to the top management, who are the driving force for the expansion. As they say, if you want to know, follow the money and the power.
So where are we? There was no void out there for Farm Credit System that the Farm Credit System was statutorily appointed to fill. There were lots of ways for them to diversify. There is a safety and soundness risk. This proposal could reduce credit to and raise the cost of credit to the medium and small farmer. This could reduce the tax income to the Government. This could be the nose or maybe even the neck of the camel under the tent. Is there any limit? And this could accelerate—and this is very important—the concentration of agriculture producer/agriculture business. Neil Harl gives a lot about that. He is afraid that the producer is going to be taken over by the agriculture business. And many of the old members are opposed.
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The System now concentrated that System debt is now concentrated among the more established and larger operators. They own more land and are more likely to be in the higher income bracket than the farmers that borrow from commercial bank. Is this the selected destiny for the Farm Credit System?
Does Congress have the power to control this or curtail this? I don't know. But I do know that if they limit the GSE status, or if you even mention limiting the GSE status, you will have the Farm Credit System so distraught, they would be jumping in the tidal basin as Fanny Fox did a few years ago. Thank you.
[The prepared statement of Mr. Dean appears at the conclusion of the hearing.]
Mr. LUCAS of Oklahoma. Thank you, Mr. Dean. Mr. Harris, let us cut straight to the point. Based on your experience, as part of the Farm Credit System, how will the proposed rules affect the Farm Credit Bank of Wichita? Your assessment.
Mr. HARRIS. My assessment is that the farmers and ranchers in the four States that we cover will benefit by having more freedom to choose which lender they want to borrow from. Because we have heard that there are opportunities to diversify their portfolio or get consent of the neighboring association, not always will the neighboring association allow another one and give that consent, therefore, the farmer and rancher suffers. I think there is already some overchartering within the district. And that has existed for more than a decade, and that has not proved to be harmful to any of the institutions which are overchartered. I think the Farm Credit Bank of Wichita will continue to do fine and particularly continue to do fine under a freedom of choice for customers to borrow from which association they desire to borrow from.
Mr. LUCAS of Oklahoma. Do you believe a clear majority of the folks in your System will favor this proposed rule?
Mr. HARRIS. When you say the majority of folks in our System, I can speak very clearly to the four States that we cover.
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Mr. LUCAS of Oklahoma. Which is all you can speak for, yes.
Mr. HARRIS. Yes. Kansas, Oklahoma, Colorado, and New Mexico. We fund those 26 associations and I am not aware of a single association that has opposed national charters. And, Mr. Chairman, in your home State of Oklahoma, we have some of the smallest, average-sized associations in the Farm Credit System and they have been supportive of national charters because they see it a way to step outside of their local territory, not shore to shore, border to border. Maybe they are moving off into the next county to the borderlines of their current territory. So how they use national charters will be much different than others would portray and try to paint. But for the most part, yes, very supportive of national charters and the freedom for the farmers and ranchers to choose for themselves which association they would like to borrow from.
Mr. LUCAS of Oklahoma. Mr. Burns, Mr. Dean, you make it very clear that you are not in favor of FCA's proposed rules. One of the responsibilities, privileges, or challenges I face, as a member of this Agriculture Committee, is also being a member of the Financial Services Committee. And having played my part in that 65-year process to ultimately pass the Graham-Leach-Bliley Act, with the goal of knocking down barriers, to increase competition, and to modernize our country's financial laws, which, of course, I think, we would all agree in this room, the most important goal for Congress is to make sure that our farmers and ranchers have the best possible rates and the absolute greatest potential for competitive service.
So let me ask you a question sitting in the shoes as chairman of this subcommittee with jurisdiction over credit. What steps do you recommend that Congress, or for that matter, FCA, take to ensure that all of our farmers and ranchers out there have fair and adequate access to credit and the same quality of lending opportunities?
Mr. DEAN. Do you want me to go first?
Mr. BURNS. Sure.
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Mr. DEAN. Well, I think it is already out there. I think there is ample lenders out there to fill all the need there is now. And, as I pointed out from my statistics, I don't think there is a problem out there. In the hard times, in the 1980's, which some of here remember, maybe all of us, I don't know, that it was the rural banks that took up the slack at that time.
We are concentrated on the area that we are in and on the commodities that we can loan on. But we are happy with that concentration. We are comfortable with it. We understand it. We are probably there when somebody else runs. If you think, when these mega corporations—for example, when Bank of America buys a bank in Des Moines, IA, if you think that Bank of America's main purpose or main interest in Des Moines, IA, you are smoking funny cigarettes.
Mr. BURNS. Mr. Chairman, as it relates to in terms of this national charter's proposal, I cannot imagine a Farm Credit System association crossing their territorial border very far to look for loans of 25 and 50 and $75,000. The customers my bank has lost to Farm Credit System through the years have been customers that tend to borrow $1 million and upwards. Those are prime targets. That is where the price and competition gets very extensive.
Studies by the USDA and others have shown that Farm Credit System institutions have not done a particularly good job of servicing the credit needs of all producers that are already in their own defined territories, in terms of their use of a farm service agency here and TEA Programs and other studies. And I understand that recently they have released some numbers. They have defined who they consider to be a small farmer, but they used a fairly high threshold to do that. And so that when you look at those numbers, it appears like that they are filling that role. Quite frankly, I would question that they are serving as big a role as you would expect from a Government-sponsored enterprise than somebody that has the advantages, competitive advantages, that they enjoy.
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Mr. LUCAS of Oklahoma. Thank you, Mr. Burns. Mr. Stenholm.
Mr. STENHOLM. Thank you, Mr. Chairman. Since 1980, you examined the credit situation, Farm Credit System has maintained about 25 to 30 percent of the total farm debt market. Commercial banks have gone from 21 to 40 percent of the market during that period of time. I think it substantiates your arguments, and from the banking industry that you are doing something right. By the same token, I am a little curious because it seems to me that national charters will provide competition. Most of the time you and others testify in favor of competition, but yet here there seems to be at least a taste of fear of competition. My question to you, Mr. Burns, and, Mr. Dean, would not farmers and ranchers in the areas in which you serve be better if they have additional competition for their credit needs?
Mr. BURNS. I can assure you, Congressman, all of our borrowers want to borrow money at the cheapest rates that they possibly can. I am fully in favor of competition. I have been an agriculture banker for 29 years. I can assure you I have never seen the competition level, and during that period of time, as intense as it is now. And not competition between necessarily my bank and the Farm Credit System. My bank and other commercial banks and assurance companies, John Deere Credit, Pioneer Credit—there are many, many more sources of availability of credit to farmers than there ever has been before.
I don't think the question is so much whether if commercial banks have 41 or 42 percent of the market in the Farm Credit System, does that indicate that something is out of kilter there? I would wonder if banks have 41 percent of the market and the Farm Credit has 26 percent—and I think that is about what those numbers are—there is another 33 percent somewhere that is basically being provided through the private sector. The exception of that would be direct loans to agriculture from the Farm Service Agency, which would represent, I think, about 7 percent.
So in the private sector is serving agriculture. We have shown since the 1980's that the roles, as terms of market share between Farm Credit and commercial banks, has been reversed. I think it has been shown that adequate credit can be provided to American agriculture, quite frankly, without a subsidized Government-sponsored enterprise. I think that is what that shows.
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Mr. STENHOLM. That leads me to another question though. Mr. Harris, does the Farm Credit System have an advantage over commercial banks because of its GSE status and tax-exempt status in the area of long-term lending?
Mr. HARRIS. Personally, I do not think so, because since the 1980's, commercial banks have found a number of avenues for lendable funds. Certainly, they have federally insured deposits. They have access to deposits which Farm Credit does not. Just recently, they have been given access to the Federal Home Loan Banks, which they, themselves, are tax-exempt, as are Farm Credit banks. So they have access to GSE funds just as does Farm Credit.
Mr. STENHOLM. Mr. Burns, and, Mr. Dean, do you agree to that? Do banks have access to the GSE funds, similar to what Farm Credit has?
Mr. DEAN. No. I don't think they do. And, of course, if Mr. Harris is correct in his assumption, why, he would be happy to give it up the GSE status.
Mr. STENHOLM. No. That is not what I asked. I said, do banks have access to the GSE lending program——
Mr. DEAN. They do, but they don't. It is similar to, but it is not as extensive or as good.
Mr. STENHOLM. We do have the people behind you shaking their heads in disagreement with you on that, Mr. Dean, and I think that perhaps we may want to clarify that answer for your and my benefit for the record.
Mr. DEAN. Well, for us to go-to the Federal Home Loan Bank and borrow money, the amount you borrow and how often you borrow and when you go in, doesn't give you access on an ongoing basis the same way it is at the Farm Credit System.
Mr. HARRIS. Then how about we each have access to Farmer Mac?
Mr. DEAN. We do. We use it.
Mr. HARRIS. On the same basis.
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Mr. DEAN. We use it.
Mr. HARRIS. So my point is, there are multiple avenues in which commercial banks can access funds. It used to be that we were advantaged—Farm Credit was advantaged because of our GSE access to the market. My point is, there are multiple access avenues for commercial banks, and that is a level playing field. In fact, that has been changed recently. And I would contend that there is plenty of access for all of us to find the funds. The issue is, where are the other advantages.
Mr. BURNS. Income taxes would be one, I might suggest, Federal Land Bank Associations. If I make a dollar on a loan that I have made to a farmer to buy a piece of real estate, that dollar of income is taxed to my bank and to all other commercial banks and all other private sector lenders. That dollar of income made by a Federal Land Bank is—they do not pay Federal income tax on that. That is a significant competitive advantage outside of the funding source. I would say, the one part of H.R. 10 that was extremely helpful to the community banks, and especially rural community banks, was expanded access to the Federal Home Loan Bank, and we are very appreciative for that.
Mr. STENHOLM. And I thank you for that comment. There were many things in H.R. 10 that I was very supportive of because of the effect on community banks. By the same token, I am having a difficult time following the opposition to the question before us regarding this particular question on national charters. I am having a difficult time understanding the opposition that is coming. And I apologize for not being here to hear all of your testimony. I will be reading it and we will be following up since the comment period is still being extended for any kind of further explanation from you. And I appreciate your being here and your testimony and your answers to my questions. Thank you.
Mr. LUCAS of Oklahoma. Mr. Osborne.
Mr. OSBORNE. Yes. I just have one brief question. Is there any data available that shows comparison of commercial banks and Farm Credit in regard to a number of low-risk, medium-risk, and high-risk loans? I realize that might be a little bit arbitrary. But if Farm Credit does, in fact, exist primarily as a Government-sponsored enterprise to fill a niche or fill a need or a void, it would seem that there would be a little bit higher percentage of high-risk loans assumed because of whatever advantages you have tax-wise. And so I would like to look at that. You hear terms like cherry-picking and so on, but what I would rather see is the data if it is available.
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Mr. BURNS. Congressman, I do know that there was a study done not in the distant past, by the USDA, that showed that when Farm Service Agency programs, those guaranteed loans that are made to farmers that are, by definition, have some sort of weakness that may be—and because of that guarantee, banks are able to make those loans. Banks have 41 percent of the farm debt market share in this country. Banks make over 80 percent of those USDA-guaranteed loans. On that, you would expect that if the Farm Credit associations in this country have 25 or 6 or 7 percent of the debt, you would expect them to have 25 or 6 or 7 percent of that guaranteed stuff if that is market that they were ready, willing, and able to serve. They have 15 percent. Banks have twice as much as the numbers would indicate you would think banks would have. Farm Credit has half as much as you would think Farm Credit would have.
Mr. OSBORNE. Mr. Harris, do you have any thoughts about it?
Mr. HARRIS. I am not aware of any reliable information, and perhaps some of the statements made by Mr. Burns might be conjecture. But if, in fact, having a portfolio of risky loans is saying that we are doing a good job, we have certainly had our share as we came through the 1980's. And that was a very difficult time for not only Farm Credit, but also for commercial banks.
I would say that FSA, in getting guarantees, that has been a very cumbersome process, and they have come out with a preferred-lender program to help smooth that activity and that process. And half of the applications for preferred lenders have been the Farm Credit System institutions. And with only 130 to 40 Farm Credit institutions having half of the applications for a preferred-lender status that they have granted thus far, would indicate to me that we are serious about using guarantees where they are appropriate and we intend to use them on a pretty wide scale.
Mr. OSBORNE. And one further question for Mr. Harris. I am real interested in the survival of young farmers. And I have heard some comments previously that Farm Credit is trying to do some things in that area with loans for young farmers. And my question to you is, can you expand on that a little bit and are these loans that are more risky or—there undoubtedly are some young farmers who are still a very good credit risk and that any entity, whether it be Farm Credit or a commercial banker, would be glad to have them. So what I am saying is, is there some area of the credit system that you are attempting to serve that you don't think the commercial bankers are serving?
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Mr. HARRIS. Well, certainly, the young farmers that we bring into the business are the customers of the future. And every association in their business plan, at least, tries to address how they intend to look at young, beginning, and small farmers, and how they intend to serve that segment. As I look at the activity across our district, a very substantial amount of the portfolio, as well as the new loans made in our four-State area, were to farmers under the age of 35 or individuals who have been farming for less than 10 years. And a very, very high percentage of the loans that we make and have in our portfolio are $50,000 and less.
So, again, we are trying to do what we can to bring young farmers and ranchers into the agricultural lending. We also know that there are a lot of individuals, older individuals, who have daughters, sons, son-in-laws, daughter-in-laws who are in the operation, but they have not been counted as part of the young, beginning farmer group.
I have got a Board of Directors made up of eight individuals, seven of which are farmers and ranchers, active farmers and ranchers. Of those seven, three of those individuals have sons, daughters, or son-in-laws involved in their operation. But when you look up on the loan list, it shows that dad is the major borrower, when, in fact, there are younger folks involved in the operation.
Mr. OSBORNE. OK. Thank you.
Mr. DEAN. Congressman Osborne, the Assistant Secretary of Treasury—and I took this from his quote—says,
USDA research has found that farm operators borrowing from the Farm Credit System tend to be more financially secure than the average borrower and that the System debt is concentrated among the more-established and the larger operators. For the farm operators whose primarily lender is the System, USDA reports that they own more land and are more likely to be in a higher income bracket, than farmers who borrow from commercial banks.
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Mr. LUCAS of Oklahoma. Any response, Mr. Harris, before we go to our next witness?
Mr. HARRIS. No. I have read those statistics. But let us also recognize that a lot of the Farm Credit portfolio is in real estate loans. And when you look at who is the specialist in real estate loans, it generally is the Federal Land Bank, the Federal Land Credit side of our business. And so is it surprising that some of the large land loans are held by Farm Credit institutions as opposed to commercial banks who haven't been that active in real estate lending over the past numerous years or decades? I don't think that is surprising at all.
Mr. LUCAS of Oklahoma. Thank you, Mr. Harris. Mr. Graves.
Mr. GRAVES. Thank you, Mr. Chairman. Just out of curiosity, I am still looking for some justification. As a young farmer getting started, I am probably a little bit more risky and I am looking at bottom lines and that is interest rates. With your special Government status, or however you want to put it, what advantages do you bring to the table over a commercial lending operation that might help me out as a young farmer? I mean, is it interest rates? Is it a riskier status? Is it less collateral? I am just looking for what it is that you bring to the table?
Mr. HARRIS. Well, we have been accused of predatory pricing, so maybe we do offer lower interest rates. But I can tell you if the local Farm Credit association raised all of its lending rates 50 basis points, I suspect the competition in that community will do likewise. So in the past, the Farm Credit has been, perhaps, the bellwether as to where the level of competition is. And I think we do keep a lid on interest rates. We are specialists in agricultural lending. I think we understand the business very well. I think we are willing to and able to take on some riskier loans.
But on the other hand, we don't want to make loans which are not good for the institution, but, most of all, which are not good for that young person or the more-established person, because to make a bad loan is not good for the borrower nor the Farm Credit System.
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Perhaps one of the things that I would say Farm Credit brings to the table, and I haven't heard it mentioned here today, unless I missed it, we all want to be in the business when the business is good and profitable. We are all here scrapping for some market share. But, gentlemen, I can tell you, if this committee here today would decide to reduce the subsidy to agriculture and all of a sudden we begin to see shadows of the 1980's come back, who can stay in Farm Credit lending?
There are several us in the room that have the ability to walk away from agricultural lending. There are some of us that are here because that is our mission. That is the only business we are in. We are in agricultural lending in good times and bad times. Whether we like it or not, that is our only business. And we need not forget that because, perhaps, we might see more difficult days ahead in the agricultural economy and environment. And if we do, Farm Credit won't be walking away from it. That is our only business.
Mr. GRAVES. If I get a loan from Farm Credit above what my interest rate is, what does it cost me to like—is there still—there used to be, at least, when I was in the market looking for loans, you had to join the association, that cost—and walk me through that real quick. What is that cost in terms of percentage points?
Mr. HARRIS. There is a minimal level of investment, $1,000—2 percent or $1,000, whichever is less. Farm Credit used to have 5-percent stock levels; some had greater than that. But since the mid 1980's, much of that has moved over to Farm Credit retaining earnings to build surplus and capitalize through earned surplus rather than borrower's stock. So most institutions have tried to go the minimum level of investment, which, in most institutions, would be 2 percent or $1,000 of the loan, whichever is less.
Mr. LUCAS of Oklahoma. Mr. Moran.
Mr. MORAN. Mr. Chairman, thank you. I would like to welcome Mr. Harris to the committee and reflect to the committee that he is highly regarded in our State and the surrounding region, not only as an agriculture lender, but as a good public citizen. And so I appreciate his presence here today and welcome you to the halls of Congress.
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I want to follow up on Mr. Stenholm's line of questioning. It appears to me that there is dispute among our witnesses as to the value of being a GSE lender or access to funds. There was testimony by Mr. Burns about the impact of the differential between income tax—]it is not a differential between rates—it is a difference between income being subject to income tax. But let me ask, regardless of the answers to those questions about whether there is a difference in the competitive field, what difference does that issue make in whether or not this rule should be adopted? Does the adoption of the chartering rule change the playing field, whatever it is today? Any and all?
Mr. HARRIS. OK. Excellent question because I don't think the two issues have any relation to one another. I think the competitive issues and some of those things being thrown in are absolutely irrelevant when you think about should the farmer and rancher have the choice to borrow from whichever Farm Credit institution or other institution, for that matter, that he or she chooses to. And I think the answer is, yes, they should. And we all have—us and the competitors—some of us have advantages and disadvantages. They have advantages and disadvantages. And when I look at it, the playing field is probably as level today as it has been in my 37 years.
Mr. MORAN. Mr. Burns, or, Mr. Dean?
Mr. BURNS. Their source of funding and the way that is garnered, does give them an advantage. They have a significant advantage in terms of taxes. I cannot imagine that there has been numerous instances of cherry-picking, for lack of a better term. And I know that lots of Members of Congress have gotten correspondence from bankers and probably others about that; so that has been well-documented.
To open this System up, you are going to create a gas war between associations that are all the same cooperative, all the same Government-sponsored enterprise, as these people spread their wings and venture into different territories. I can assure you our experience with the Farm Credit district out of Omaha, and that is who I compete with, they are very specific in who they target. They are large, wealthy borrowers, high-equity things. And I admire them for their business judgment and who they tend to select.
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I don't like being at a competitive disadvantage to the Federal Government in trying to provide credit to farm borrowers. I am not sure that that makes good public policy sense. But I think you are endangering a lot of the associations that are out there. I think you will endanger community banks and other lenders to agricultural as well. Obviously, they won't just call on loans that have been made by associations from other territories. I think it is a dangerous precedent. And, quite frankly, I just don't see what is to be gained from it.
Mr. MORAN. In that regard, Mr. Harris, is there a minimum size loan that would be necessary for it to be economically viable to cross borders to make a loan? I assume that you would not want to make loans in small amounts, and I don't know what a small amount is—that is what—kind of the number I am looking for—because of the increased cost of managing that asset.
Mr. HARRIS. I don't think the associations are going to use in that regard. There, perhaps, isn't a minimum level of loan. But I think what will happen is associations will find their particular niche. What are they good at? And if they are good at making smaller loans and putting those on the books at low cost, then they can move out into other territories and do that very effectively. If they have a specialization in dairy loans, they can move into areas and make dairy loans and participate that loan with the association that has that territory.
So I think the thing we need to keep in mind—you heard Chairman Reyna say that farmers and ranchers who own this System, have their money invested in it, are going to be the ones to approve the business plans of every single institution who operates under a national charter. And that Board doesn't pass these business plans lightly. They will be governing and overseeing the activity that occurs outside of their Local Service Area. And, obviously, they are not going to allow that to happen to the detriment of the folks that they have traditionally served.
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Mr. MORAN. Mr. Chairman, thank you. My time has expired. Mr. Burns, perhaps that you or your association could follow up to answer this question. If there is a way to quantify, in your opinion, the value of that tax benefit, I would like to get details of what you think the competitive disadvantage is as a result of tax treatment.
Mr. BURNS. We will try and do that, Congressman, as best we can. I have seen numbers, but not recent numbers, but it is significant.
Mr. MORAN. Thank you, Mr. Chairman.
Mr. LUCAS of Oklahoma. Thank you, Mr. Moran. And I wish to thank the panel for participating in today's hearing and helping to bring into focus the opinions and the views and the perspectives that are at stake in this very important matter. As I pointed out in my opening comments, this is just the first of a series of hearings to address the agricultural credit needs of this great country and all of the elements there within.
So without objection, the record of today's hearing will remain open for 10 days to receive additional material and supplemental written responses from witnesses to any question posed by a member of the panel. This hearing of the Committee on Agriculture is adjourned.
[Whereupon, at 4:41 p.m., the committee was adjourned, subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
Statement of Michael M. Reyna
Mr. Chairman, members of the committee, I am Michael Reyna, Chairman and Chief Executive Officer of the Farm Credit Administration (FCA or Agency). Joining me is my fellow Board member Ann Jorgensen. I am pleased to be here with you today to discuss the role of the FCA and the Farm Credit System (System) in providing sound, dependable, and affordable credit to American farmers and ranchers, their cooperatives, rural utilities, and rural homeowners in both good and bad economic times. I am pleased to report to you that the financial condition of the System is strong despite challenges and difficulties in the agricultural economy. I plan to use this opportunity to explain our proposed regulation concerning national charters for System associations.
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FARM CREDIT ADMINISTRATION
The FCA is an independent agency in the Executive branch of the Federal government. It charters, regulates and examines all System institutions. The responsibility of the FCA is to ensure that System institutions operate safely and soundly and comply with applicable laws. The FCA's governing body is a full-time, three-member Board. The President, with the advice and consent of the Senate, appoints each FCA Board member for a six-year term. The President designates one of the Board members as the Chairman of the Board, who serves until the conclusion of that member's term. The Chairman also serves as the FCA's Chief Executive Officer (CEO).
THE FARM CREDIT SYSTEM
Congress established the System in 1916 because long-term mortgage credit for farmers and ranchers was scarce. During the 1920s and 1930s, Congress expanded the System so it could extend short- and intermediate-term operating credit to farmers and ranchers and finance their cooperatives. Today, the System finances agricultural production, processing and marketing operations, certain farm-related businesses, rural housing, agricultural cooperatives, rural utilities, and the import and export of agricultural commodities. Within the scope of the Farm Credit Act of 1971, as amended (Act), System banks and associations offer their customers a wide array of loans, leases, and financially-related services that meet their needs.
Congress is very clear in the Farm Credit Act by directing ''a permanent system of credit for agriculture that will be responsive to the credit needs of all types of agricultural producers having a basis for credit.'' I particularly want to emphasize that the System's mission is to serve all types and sizes of borrowers having a basis for credit—small, medium, and large.
The System is the oldest Government-sponsored enterprise (GSE) in the United States. Although the Federal government provided the original capital for System institutions, the farmers, ranchers, and cooperatives who borrowed from System banks and associations retired the government capital by 1968. Today, borrowers own the System banks and associations, which operate as cooperative financial institutions.
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System banks, associations, and service corporations serve all 50 States and the Commonwealth of Puerto Rico. As of January 1, 2001, the System was composed of 147 institutions. Six Farm Credit Banks fund 28 production credit associations (PCAs), 38 Federal land credit associations (FLCAs), 11 agricultural credit associations (ACAs), and 52 ACA parent organizations. The ACA is the parent company with two wholly owned subsidiaries, a PCA and a FLCA. The ACA, PCA, and FLCA operate as an integrated lending business with loans made through the appropriate subsidiary. The ACA, PCA, and FLCA are jointly and severally liable for the full amount of the indebtedness to the bank under the General Financing Agreement. In addition, the three associations agree to guarantee each other*s debts and obligations, pledge their respective assets as security for the guarantee, and share each other*s capital. The three institutions have a common board and management and a common set of shareholders. Under the Farm Credit Act of 1971, as amended, the FLCA is exempt from Federal income taxes.
PCAs make short- and intermediate-term loans; FLCAs make long-term mortgage loans; and ACAs make short-, intermediate-, and long-term loans. Different System banks and associations own four service corporations that are organized under section 4.25 of the Act. These federally chartered service corporations perform functions and services for their owners, but the statute prohibits them from extending credit and providing insurance services.
The Farm Credit Banks also fund 22 other financing institutions (OFIs), which are non-System financial institutions, such as commercial banks or their affiliates, agricultural credit corporations, and production livestock associations. OFIs use the funds they borrow from Farm Credit Banks to make short- and intermediate-term loans to farmers, ranchers, and other eligible borrowers. The Act allows Farm Credit Banks to fund OFIs on the same terms as PCAs.
One agricultural credit bank (ACB) lends to agricultural and aquatic cooperatives, rural utilities, and the parents, subsidiaries and affiliates of these borrowers. The ACB also finances the export and import of agricultural commodities and farm supplies, and it provides international banking services to agricultural cooperatives and their counterparties. Additionally, the ACB funds four ACA parent organizations that serve New York, New Jersey, and the New England States.
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All seven System banks own the Federal Farm Credit Banks Funding Corporation (Funding Corporation), which sells debt securities to investors. The proceeds of these securities fund the loans that System banks and associations make to their borrowers. Earnings from these loans enable System banks to repay the principal and interest on System debt securities. The United States is not liable for the repayment of System debt securities.
Congress established the Farm Credit System Insurance Corporation (FCSIC) to insure the principal and interest on all consolidated System debt securities. As of December 31, 2000, the FCSIC fund had a balance of $1.45 billion to protect investors and, ultimately the taxpayers, from loss. Additionally, the Act requires the FCA to appoint FCSIC as the conservator or receiver of insolvent System institutions. My colleague, Ann Jorgensen, serves as the Chair of FCSIC.
The Federal Agricultural Mortgage Corporation (Farmer Mac) is another component of the System. Farmer Mac has no liability for the debt of other System institutions, and the other System institutions have no liability for Farmer Mac*s debts. Farmer Mac is an investor-owned corporation, not a member-owned cooperative. Commercial banks, insurance companies, other financial institutions, and System banks and associations may own voting stock in Farmer Mac. The Office of Secondary Market Oversight is a separate office in the Farm Credit Administration that regulates and examines Farmer Mac.
Farmer Mac provides a secondary market for agricultural real estate and rural housing mortgages. We examine Farmer Mac on an annual basis, not only for safety and soundness, but also with a critical eye in monitoring both program and non-program investments to ensure that they are consistent with its statutory mission.
SERVING YOUNG, BEGINNING, AND SMALL FARMERS
As the committee is well aware, the agricultural economy is constantly changing and farmers often restructure their operations as they strive to become more efficient. The System cannot succeed unless it responds to changes in the markets that it serves. As I noted earlier, the act states that the mission of the System is to serve all types of agricultural producers who have a basis for credit. The System finances every sector of the agricultural economy throughout our Nation. As the statute requires, it serves all types of producers—large, medium, and small.
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The FCA has made a concerted effort to improve the service that System banks and associations provide to young, beginning, and small farmers. Since 1980, the Act has required the System to develop special programs to meet the credit needs of young, beginning and small farmers. In 1998, the FCA issued a policy statement that asked each System Board of Directors to renew its commitment to be a reliable, consistent, and constructive lender to this group of farmers. Although the FCA recognized that the System already financed a significant number of young, beginning, and small farmers, the policy statement noted that more could be done. The policy statement identified a number of steps that System institutions could take to increase their lending to this group of customers.
Just recently, the FCA asked each System institution for information on its young, beginning, and small farmer program. The FCA will use this information to compile a report on successful and innovative practices that improve service to these farmers. We plan to send this report to every System institution so the ideas and experience of other institutions will help it to strengthen its own program. This information will help the FCA to identify the strengths and weaknesses of the young, beginning, and small farmer programs of individual System institutions. As a result, the FCA will no longer rely exclusively on numbers that are nationwide averages.
The most recent numbers on loans to young, beginning, and small farmers and ranchers are from year-end 1999. At that time, 16.3 percent of the System's outstanding loans were to farmers who were 35 years of age or younger, 20.7 percent were to beginning farmers with 10 years or less of farming experience, and 57.9 percent were to small farmers who had annual sales of $250,000 or less. Concurrently, 12.2 percent of the total dollar volume of loans outstanding were to young farmers, 17.9 percent were to beginning farmers, and 34.4 percent were to small farmers.
THE CURRENT CONDITION OF THE FARM CREDIT SYSTEM—THE SYSTEM'S STRENGTHS
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The quality of loan assets, risk-bearing capacity, stable earnings, and capital levels collectively reflect a healthy Farm Credit System that has rebuilt its financial strength and improved its management systems. Despite various external factors affecting agriculture, such as reduced export demand, adverse weather conditions, and low commodity prices, the System's strong financial position will help it weather adverse effects from potential deterioration in the agricultural economy.
System banks and associations have earned and retained sufficient income over the past twelve years to rebuild their capital. For example, since 1994, the System has steadily earned $1 billion or more each year. This has resulted in a large capital cushion that will enable the System to absorb losses and remain a viable lender to agriculture during downturns in the agricultural economy.
The quality of the System's loan portfolio has remained generally favorable despite continued adverse economic conditions in the agricultural sector and a slight deterioration in the performance of certain loans to cooperatives. Signs of deterioration have yet to materialize in the System's loan portfolio or performance, and early warning indicators are much more positive than in the mid-1980s when the System last experienced serious asset quality problems.
Loan volume continues to grow, while levels of nonaccrual and nonperforming loans Nonperforming loans consist of nonaccrual loans, accruing restructured loans, and accruing loans 90 days or more past due.
consistently remain low. Delinquent loans also remain minimal at less than half of one percent of total loans.
The System continues to build capital through increased loan volume and earnings. Total capital as a percentage of total assets has increased from 14.2 percent as of September 30, 1996, to 15.6 percent as of September 30, 2000. All institutions met their regulatory ratio requirements, and most greatly exceeded them. Permanent capital ratios at System banks and associations ranged from a low of 9.94 percent to a high of 38.2 percent compared to the 7.0 percent regulatory requirement.
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Better management practices have resulted in stronger loan underwriting standards at most System institutions. Improved loan underwriting standards usually results in sound loans. Additionally, these standards insulate an institution's capital from excessive risk in a challenging operating environment.
As a result of improving their management and internal controls, System institutions have been diligent in identifying and dealing with troubled loans early on. Also, improved asset/liability management practices have enabled System banks to effectively manage interest rate risk.
The FCA uses a very extensive Financial Institutions Rating System (FIRS) to identify changes in each System institution's risk characteristics. The FIRS is similar to the rating system used by the other Federal banking regulators, but it reflects the non-depository nature of System institutions. Currently, FCA rates all System institutions, except one small association, in the two highest of the five FIRS categories. As of September 30, 2000, institutions with composite ratings of one or two represented more than 99 percent of all rated institutions. FCA assigns every System institution a rating for capital, assets, management, earnings, liquidity, and sensitivity to interest rate fluctuations. In addition, our examiners provide continuous oversight of System institutions to ensure that risk in the System is adequately monitored and addressed. Every institution receives a composite rating and a rating for each of the six individual rating components at least quarterly to ensure assigned ratings reflect current risk and conditions in the System.
The FCA uses various forms of enforcement authority to ensure the operations of System institutions are safe and sound and comply with laws and regulations. This authority includes the power to enter into formal agreements; issue orders to cease and desist; levy civil money penalties; and suspend or remove officers, directors, and any other persons or forbid them from engaging in System institutions' affairs. If the FCA Board votes to take an enforcement action, our examiners oversee the institution's performance to ensure compliance. Currently, no System institution is under an enforcement action.
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THE CHALLENGES AHEAD
Economic stress in agriculture, however, is beginning to temper this good news.
As this committee knows all too well, prices for many agricultural commodities are low while farm production costs, particularly for energy, are increasing. As a result, the profit margins of many farmers are squeezed. Federal support for agriculture over the past several years have been necessary to help farmers repay their loans. Obviously, farmers, System institutions, and the FCA would much prefer that more favorable commodity prices would generate higher profits and better income for agriculture. In addition to strong capital and diligent management at System banks and associations, Federal assistance to farmers has also played an important role in helping the System earn income and maintain the quality of its loan portfolio.
Two indicators of profitability, net interest margins and net interest spreads, have been trending downward since 1995. Return on Assets has also followed a declining trend for the past six years, but it increased in 2000. Although these downward trends raise concerns, they also stress why retained earnings and strong capital are crucial to the continued financial strength of System institutions.
The allowance for loan losses continues to be adequate to cover risk in the loan portfolios. Since 1993, the System has steadily increased its Allowance for Loan Losses to almost $2 billion in the past year. This increase is necessary to address the stress in the farm economy. However, nonaccrual loans decreased slightly in the past year.
A SINGLE-INDUSTRY LENDER
Perhaps the biggest challenge facing the System is the fact that it is a single-industry lender in a shrinking market. The number of farmers and ranchers has steadily declined ever since the System was founded in 1916. However, the System's mission is to finance agriculture in both good and bad economic times. In contrast, the System's competitors can abandon agriculture during recessions, and lend instead to other sectors of the economy where the profit potential is greater and the credit problems are fewer.
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The loan portfolios of System institutions, as single-industry lenders, are concentrated in agricultural commodities. Some of the larger System institutions have successfully diversified the agricultural commodities in their loan portfolios. As of September 30, 2000, however, there were 197 instances at 135 associations where loans to a single commodity exceeded capital. The System lends overwhelmingly to agriculture, which is the sector of the economy that is particularly vulnerable to changes in commodity prices, currency fluctuations, bad weather, diseases, pests, and other difficulties.
The System's market share slipped during the farm crisis of the mid-1980s. During the 1990s the System's market share rose modestly and then leveled off.
Historically, the charters of many System associations have confined their operations to geographic areas where the agricultural economy is dependent on two or three commodities. These geographic barriers make it increasingly difficult for associations to compete. Trade creditors are not subject to geographic limitations, and geographic restrictions on commercial banks have been eased in the past decade. New technology such as e-commerce also expands the geographic markets for lenders and other financial service providers.
Obviously, these commodity and geographic concentrations pose special challenges to the System and the FCA, as its safety and soundness regulator. The System is responding to these challenges. Many System associations have merged, consolidated, or restructured their operations in the past three years. As a result, these associations have become more efficient, which lowers the cost of credit to farmers, improves customer services, and increases the earnings of these borrower-owned institutions. System institutions also have embraced technological innovation and they routinely use the Internet to reach customers.
These changes are good. But more is needed to assure that the System can meet the challenges facing a single-industry lender in an economic environment that is undergoing continual and rapid change.
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NATIONAL CHARTER PROPOSED RULE
If the Farm Credit System is to remain a viable source of credit for America's farmers, ranchers, and rural communities, as Congress directed, it must be able to respond to changes in the markets that it serves. This is not a new concern. Our proposed rule on national charters would help the System modernize its credit delivery structure, and at the same time, maintain safe and sound operations.
The national charter rule would end the FCA's practice of generally issuing exclusive territorial charters to direct lender associations. The FCA's authority to grant and amend the charters of System institutions is clear and unambiguous. The courts have reaffirmed this authority on several occasions. With limited exceptions, Farm Credit statutes do not require exclusive charters for System institutions. Instead, the FCA, as a matter of policy and practice, usually issued exclusive charters to direct lender associations. Notwithstanding this fact, the territories of a number of System associations have overlapped for some time. Overchartering has not posed any safety and soundness concerns.
I wish to emphasize that national charters will in no way expand the lending powers of System institutions. A national charter will not enable a System association to enter a new credit market that it cannot serve under existing law. A national charter neither authorizes an association to lend to ineligible borrowers, nor make loans for purposes that are not authorized under the Act or its implementing regulations.
Opponents of national charters allege that once System associations start operating nationwide, they will abandon production agriculture in favor of large agribusinesses and nonagricultural credit markets in rural communities. Under the law, System associations can only finance businesses that provide farm-related services to farmers and ranchers. As a result, System associations lack authority to finance companies that sell goods, such as farm equipment, to farmers and ranchers. Similarly, large food processing conglomerates are ineligible to borrow from System associations. The Act authorizes System associations to finance only processing and marketing operations that are ''directly related'' to a borrower's farming, ranching, or aquatic operations.
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Cooperative principals also prevent System associations from abandoning farmers and ranchers. Unlike commercial banks and other lenders, the farmers and ranchers who borrow from the System own and control these institutions. Cooperatives operate on the principle of one person, one vote. As a result, no farmer can take control of a System association simply by buying more voting stock.
The System's farmer ownership and control also limit the opportunity of associations to ''cherry-pick'' large credits on a nationwide basis. Farmers of nationally chartered associations will still elect their associations' boards of directors, and a majority of the directors will be farmers. It seems doubtful that these directors would allow management to routinely offer lower interest rates and better credit terms to large operators elsewhere than they themselves receive.
Furthermore, FCA examinations of System institutions include reviews and assessments of overall institutions pricing practices. The FCA Examination Manual states, ''The practice of setting interest rates with a willful disregard for the costs of doing business to attract or retain borrowers is an indication of unsafe and unsound banking practices.'' Therefore, in addition to System stockholders not tolerating such a practice, I can assure you that FCA, as the safety and soundness regulator, does not tolerate such a practice.
HISTORICAL BACKGROUND
The Agricultural Credit Act of 1987 encouraged the Farm Credit System to restructure by creating four new types of System institutions—Farm Credit Banks, agricultural credit banks, Federal land credit associations, and agricultural credit associations. This restructuring led to numerous instances of overlapping territories and competition among associations. This has led to increasing public discussion and debates over whether the FCA should end the policy of exclusive charters for direct lender associations.
Our proposed national charter rule culminates a decade of discussion and debates about how to ensure that the System remains safe and sound. In May of 1990, the Secretary of the Treasury issued a report on GSEs that recognized that the System faced unusual business risks. This report acknowledged that System charters limited the operation of individual associations to specific geographic regions, causing an institution's ''performance [to] rise and fall with the fortunes of a single crop or perhaps with those of a limited number of customers.'' Report of the Secretary of the Treasury on Government Sponsored Enterprise, May 1990, page D-15.
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Although the Secretary's report made no recommendation about how to best address this problem, it generated much thought, discussion, and debate.
The FCA first raised the question about ending the policy of geographically exclusive charters in 1994 when it asked the public to comment on a proposed Board policy statement on non-exclusive charters. 59 FR 17543 (April 13, 1994).
At other times during the past decade, the FCA has sought comments, input, and ideas from a wide variety of sources, including the general public, academicians, and policy experts.
In July 1998, the FCA Board issued a Philosophy Statement that, among other things, announced support for abolishing geographic restrictions on System institutions. The first major step in implementing the FCA Board's Philosophy Statement occurred in November 1998, when the FCA published a proposed rule that would have repealed regulations that required notice or consent when a direct lender made or participated in loans in the territory of another association. The Agency received over 200 letters and considerable comments during the 180-day comment period. Reaction was split. The Board suspended action early in 2000 to study the matter further.
In April 2000, the FCA adopted a final rule that repealed the notice and consent requirements that applied when a System institution bought participation interests in loans that a commercial bank made in the chartered territory of another System institution. By repealing these regulations, the FCA Board authorized System institutions to participate in loans that non-System lenders, including commercial and community banks, made to eligible farmers and ranchers anywhere in the United States.
The FCA did not repeal the notice and consent requirements for direct lending. Instead, the Board announced plans on March 8, 2000 to remove geographic barriers by granting national charters to System direct lenders that apply for them. The FCA sent a Booklet to all System institutions on May 3, 2000 that provided guidance on national charters. We also posted this Booklet on our Website.
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The Booklet imposed no requirements on System institutions. Instead, it communicated the FCA Board's willingness to accept national charter applications from any direct lender that voluntarily applied for one. Because our National Charter Initiative sparked intense public interest and debate, we published the Booklet in the Federal Register in July 2000 65 FR 45066 (July 20, 2000).
and requested comment.
We received over 1000 comments about national charters from System and non-System sources. After the FCA provided guidance on how to apply for a national charter, approximately 97 percent of all eligible associations indicated an interest in applying for a national charter.
Several parties raised procedural concerns about the Booklet. They believed that the law requires the FCA to pursue a notice and comment rulemaking for national charters. While FCA's legal counsel continues to believe that the Agency may issue or amend charters without conducting a rulemaking, the Board decided to propose a rule. A rulemaking dispels any doubt that this initiative does not comply with applicable administrative procedure laws. Second, a rule will establish strong business planning requirements for any association that applies for and receives a national charter. Third, a rule requires associations that request and receive a national charter to comply with existing FCA regulations that impose strong and enforceable capital, loan underwriting, and internal control requirements on all System institutions.
Before I describe our proposed national charter rule to you in greater detail, I want to reiterate that the ideas expressed in this proposal are not new. Indeed, the FCA, the System, commercial banks and their trade associations, academicians, and policy experts have debated the removal of geographic restrictions of System associations for several years.
The FCA Board adopted the proposed rule on January 11, 2001, and sent it to the House and Senate agriculture committees for a 30-day review. The proposed rule was published in the Federal Register on February 16, 2001 for a 30-day comment period. I want to assure you that the FCA will seriously consider and carefully weigh all substantive comments that we receive about the proposed national charter rule.
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CRITERIA FOR NATIONAL CHARTERS
The proposed rule would establish clear standards so direct lender associations may apply for, receive, and operate safely and soundly under a national charter. A national charter authorizes a direct lender association to exercise all powers conferred on it under the Farm Credit Act and FCA regulations throughout the United States and the Commonwealth of Puerto Rico or within any lesser territory that the FCA specifies.
National charters will not initially include the territories of certain associations that currently operate in Alabama, Mississippi, New Mexico and parts of Louisiana. The statute requires the shareholders of these associations, their funding banks, and in some cases, their boards of directors to consent before the FCA can add their territory to the charter of any other System institution. The FCA initiated a separate rulemaking so the farmers and ranchers who own the associations in these four states will have the opportunity to vote on whether to allow other associations to serve their territories. 65 FR 26776 (May 9, 2000); 65 FR 58486, (Sept. 29, 2000).
No direct lender association that is under a cease and desist order that has become final is eligible to request a national charter. Once an association receives a national charter, the FCA reserves the right to restrict the association's operations if it fails to operate safely and soundly.
Each association that receives a national charter will be assigned a Local Service Area (LSA). For existing associations, the LSA is the territory that they served immediately before they obtained a national charter. Under the proposed rule, each association with a national charter must offer credit and related services in its LSA. Additionally, the LSA requirement will ensure that the System, as a whole, carries out its public policy mission of extending credit and related services to farmers, ranchers, and other eligible customers in every part of the United States. Therefore, each association with a national charter must provide dependable, sound, adequate, competitive, and constructive credit and related services to all eligible and creditworthy customers within its LSA on a priority basis, consistent with safe and sound lending practices. The FCA expects each nationally chartered association to make special efforts to serve young, small, and beginning farmers in its LSA.
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The proposed rule establishes the procedures that each association must follow when it applies for a national charter. Additionally, each association that obtains a national charter must comply with new regulatory business planning requirements. At a minimum, an acceptable business plan must include:
A mission statement;
Internal and external factors that are likely to affect the association during the planning year;
Quantifiable goals and objectives;
Pro forma financial statements for each year of the plan;
An operating budget
A capital adequacy plan; and
A detailed plan for activities in the LSA
These business plans must be updated every year.
Each nationally chartered association must comply with statutes and regulations that govern capital adequacy, loan underwriting and servicing requirements, internal controls, consumer protection, equal credit opportunity, and fair lending practices. Additionally, the FCA will allow only direct lender associations that operate in accordance with capital, assets, management, earnings, liquidity, interest rate sensitivity, and other safety and soundness standards to lend and offer related services nationally.
In conclusion, Mr. Chairman, the Farm Credit System must meet the challenges of a rapidly changing agricultural economy and achieve its mission of providing sound, dependable, and affordable credit to farmers, ranchers, and their cooperatives in both good times and bad. The System has made significant progress in building and maintaining its financial strength in the past decade so it can better serve its customers. However, the pace of change in the rural economy is quickening, and the System must remain ever vigilant if it is to remain relevant to farmers. Improving geographic diversity and reducing industry concentration in System loan portfolios is essential for mitigating safety and soundness risks. The FCA Board believes that the proposed rule on national charters ensures that the System remains a dependable source of credit for farmers in a competitive and rapidly changing economy.
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I thank you for the opportunity to address this committee about the challenges facing both the FCA and the System and to explain to you the proposed rule on national charters. I would be pleased to answer any questions at this time.
Statement of Phil Burns
Mr. Chairman and members of the committee, I am pleased to appear on behalf of the American Bankers Association (ABA) to participate in this important hearing to discuss national charters for Farm Credit System (FCS or System) direct lending institutions. We thank the committee for holding this hearing because this proposal by the Farm Credit Administration (FCA or Administration) represents a dramatic departure from the way in which the Farm Credit System has operated for over 80 years and poses a real potential for harm to producers, taxpayers, and rural America. We urge Congress to stop this process before it is too late.
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.
I am Phil Burns, chairman of Farmers and Merchants National Bank in West Point, NE. I am a past chairman of the ABA's Agricultural and Rural Bankers Committee and I am a past president of the Nebraska Bankers Association. Farmers and Merchants National Bank is an $80 million bank located in Cuming County, Nebraska. Our total loan portfolio is $76 million, 79 percent of which is agricultural credit extended to farmers and ranchers in our service area. Our customers' heavy concentration in livestock has helped to mitigate the effects of record low prices for most of the crops grown in our area. However, our customers are not immune to the economic downturn in agriculture and generous government payments in 1999 and 2000 have helped our producers tremendously. The response by Congress to the needs of production agriculture has helped the financial services industry avoid widespread credit problems like we faced in the 1980's.
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The 1980's were incredibly difficult times for farmers and ranchers and their lenders in Nebraska and throughout the country. While over 300 commercial banks nationwide failed during that period as a result of the farm credit crisis, a $4 billion line of credit from the Federal Government bailed out most Farm Credit System institutions in 1987. The financial crisis in which the FCS was mired was precipitated by expansive legislative and regulatory changes designed to reinvent a System that was playing an increasingly diminished role in the agricultural credit market.
We are here today to talk, in part, about the legacy of that period. That was a time when reckless lending by the Farm Credit System, America's first Government Sponsored Enterprise (GSE) and the only tax-advantaged retail lending GSE in the country, wrought havoc on the farm and rural economy of our nation. It was a time when the System's regulator, the FCA, was assuring Congress and the Nation that all was well while in reality their house was burning down. Those of us who lived and worked through that period feel that this latest proposal by the FCA may mean that history is repeating itself.
After the crash of the farm economy in the 1980's, it was the banking industry that picked up the pieces and worked to restore the economic health of American agriculture. Following the Federal intervention in 1987, the FCS has concentrated and consolidated its business. Outstanding System loans to farmers and ranchers declined from $64.6 billion (33 percent of the agricultural credit market) in 1984 to a low of $35.4 billion (25 percent of the agricultural credit market) in 1993. On December 31, 2000, outstanding System loans to farmers and ranchers were approximately $46.1 billion or 26 percent of all farm debt. During that same period, the banking industry held $47.2 billion in agricultural loans (24 percent of the market) at the end of 1984, $54.5 billion in 1993, and $71.4 billion (41 percent of the market) at the end of 2000.
I have reviewed this recent history because it illustrates three very important points. First, the FCS has assumed a diminished role in a market brimming with competitive providers of agricultural credit. Second, commercial banks have more than filled the void left by the FCS. Third, the national charter initiative is reminiscent of the 1980's in that the System is once again desperately trying to reinvent itself as it has assumed a diminished role in the agricultural credit market and has found that its mission has been all but met by the private sector. Indeed, history does appear to be repeating itself.
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We believe that granting national charters to System institutions would serve no credible public policy purpose; would negatively affect small, beginning, and economically disadvantaged farmers; would raise serious safety and soundness questions; would expose the American taxpayer to incalculable risk; and would destroy any shred of the notion that the FCS is a borrower owned and locally controlled cooperative lending organization. This proposal simply is not in the best interest of the farmers, ranchers and rural residents the System was chartered to serve.
NATIONAL CHARTERS WILL SERVE NO CREDIBLE PUBLIC POLICY PURPOSE
The FCA would have Congress and the public believe that System institutions are shackled to an antiquated system of frozen geographic territories and that by eliminating geographic boundaries the System will be insulated from risk due to fluctuating commodity prices, isolated weather-related problems and all sorts of additional risks that the FCA pins on defined geographic territories. The truth is that System institutions have available a number of options by which they can diversify their loan portfolio either geographically or by commodity. System institutions have always had the authority to lend in any territory with the concurrence of the System institution that is serving the territory they wish to enter. In reality, the proposal for national charters has nothing to do with better serving farmers and ranchers; it has everything to do with expanding market share by larger System institutions at the expense of smaller System institutions.
Also, System institutions may use the loan participation regulations, approved by the FCA in April 2000, to participate, up to 100 percent, in any qualifying loan made by a non-System lender. While we are concerned about the potential impact of this regulation, it has been adopted and if the FCA were truly pursuing an agenda designed to improve the flow of GSE credit into rural America, and to diversify the FCS risk profile, they would demand that System lenders work closely with and participate in loans with banks and other private and public credit providers to ensure that all rural Americans receive the benefits of the System's GSE subsidy.
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The FCS was created in 1916 as a government-sponsored enterprise in large part because national banks and many state banks were prohibited from making real estate loans. Bert Ely, The Farm Credit System: Reckless Past, Doubtful Future 5 (1999)
As a GSE, the System enjoys beneficial Federal and state tax treatment and has access to lower cost lendable funds. It has been estimated that the subsidy afforded to the FCS by virtue of its GSE status amounts to over $1 billion per year. Id at 20
The FCA seems to have adopted a ''tough love'' approach to their regulation of the FCS. By granting national charters, the FCA would create a system that will have FCS institutions competing with each other. Why did the FCA, as the safety and soundness regulator of the cooperative FCS, decide that it was acting responsibly in proposing a Darwinian process that will result in survival of the fittest FCS institutions and the extinction of the weaker?
The FCA made a monumental understatement in their National Charter Booklet (Booklet) in advising System institutions regarding national charters:
Each association's board must choose whether to apply for a national charter. If the association chooses not to apply for a national charter, it still should consider revising its business plan to reflect changes in its operating environment. As other associations with national charters begin to offer products and services to customers in its territory, the competitive environment may change significantly.
What public policy benefit does the FCA see in developing a process by which System institutions will compete with one another? We have reviewed all public statements made by the FCA about their decision and we have been unable to find any credible justification for sending a GSE on such a new and reckless course of internal competition. In what way do we as taxpayers benefit if System institutions prey upon each other for market share? For the last 10 years our members have complained to Congress and to the FCA about the pricing practices of System institutions. A clear pattern has emerged: despite a Federal statute that prohibits their doing so, System institutions will consistently under price credit on large deals in order to get the business. We have many documented cases of this practice, yet the FCA has continued to deny that System institutions have engaged or do engage in any below market pricing. We disagree. We are very concerned that with national charters, System institutions will engage each other in a disastrous round of low ball pricing that will undermine the safety and soundness of the entire System. The FCA fails to acknowledge this problem and fails to address what will happen to all lenders once System institutions start to cannibalize each other.
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An examination of the proposed regulatory framework 66 Fed. Reg. 10639 (February 20, 2001)
raises a number of public policy concerns. First, the proposed rule provides only 30 days for public comment. Id at 10639
A proposal of this magnitude should be open to public comment for a considerably longer period of time so as to allow thorough review by the greatest possible number of people.
Second, the proposal devotes a considerable amount of space to the notion of Local Service Areas (LSA). The ''Supplementary Information'' portion of the proposed rule reads in part:
The FCA believes the LSA requirement will ensure that the System carries out its public policy mission of extending credit and related services to farmers, ranchers and other eligible customers in every part of the United States. Therefore, each association with a national charter must provide dependable, sound, adequate, competitive, and constructive credit and related services to all eligible and creditworthy customers within its LSA on a priority basis.
While the FCA reminds System lenders that the public policy mission of the System is to provide dependable, sound, adequate, competitive, and constructive credit to all eligible and credit worthy customers within their local service area, the FCA proposes no specific, enforceable or measurable regulatory sanctions that would ensure that local farmers and ranchers continue to have access to a FCS lender. The FCA does not propose to restrict, in any way, the non- LSA lending of System institutions. Furthermore, despite its statement that LSA lending be done on a priority basis, the FCA does not include such a requirement in its proposed regulations. The words in the ''Supplementary Information'' section sound like a commitment to LSAs; however, there is no specific enforceable regulation proposed to give power to the symbolic words. If Congress agrees that this is an important goal, specific limitations should be applied to a System institution's lending activities outside of their LSA.
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NATIONAL CHARTERS WILL HAVE A NEGATIVE IMPACT ON ACCESS TO CREDIT FOR SMALL, BEGINNING AND ECONOMICALLY DISADVANTAGED FARMERS
We have great concerns about the negative impact national charters will have on small, beginning and economically disadvantaged family farmers as System institutions seek larger, more profitable loans at the expense of these borrowers. Although the FCA recently redefined the universe of farmers that would fit into this category to inflate their claim of serving young and beginning farmers, there is compelling evidence that suggests that System institutions are not serving this sector of the farming population. The FCA's national charter proposal will primarily or exclusively benefit large multi-state farm and ranch operations, thus exacerbating this disparity.
The System's record of lending to small family farms, beginning farmers, and economically disadvantaged farmers is spotty. Indicative is the limited participation of System institutions in the FSA guaranteed loan program. FSA guarantees allow banks and FCS lenders to make credit available to farmers and ranchers that have some sort of credit deficiency that makes it difficult for private sector lenders to make credit available without a guarantee. The maximum loan size that USDA will guarantee is $731,000 so these loans tend to be to smaller operators. USDA economists have done a great deal of research on the types of borrowers that receive benefits from this program and they also track lender participation. A recent article published by USDA economists Charles Dodson and Steve Koenig Charles Dodson and Steve Koenig, The Targeting of FSA*s Guaranteed Farm Loan Program, Volume 13, Issue 3, Journal of Agricultural Lending 50 (2000)
sheds some light on both bank and FCS participation in this program. We believe that the article also provides some understanding of the implications for small family farmers, beginning farmers, and economically disadvantaged farmers should the FCA proceed with their national charter initiative.
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In the article, the economists note:
the Farm Credit System (FCS) has made little use of FSA's guaranteed program to fund beginning farmers in Americas Heartland. While commercial banks have made heavy use of the program in Iowa, Nebraska and South Dakota, the FCS appears to have made only a handful of loans to beginning farmers in these States.
The authors went on to note that while banks hold 40 percent of all farm debt, the banking industry accounts for more than 80 percent of all FSA guaranteed loan volume. The FCS, which holds 27 percent of all farm debt accounts for just 15 percent of FSA guaranteed loan volume.
An additional observation made by Dodson and Koenig causes us great concern when examining the impact that national charters may have on access to FCS credit by smaller farm borrowers:
Because FCS associations have merged into large organizations in some regions, the delivery [of credit] to beginning farmers in a broad area can be determined by the policies of as little as one association. For example, one large association serves the states of Nebraska, South Dakota, Iowa, and Wyoming.
The FCS institutions that are scouting new territory to set up lending operations will not be looking for small loans, beginning farmer loans or loans to economically disadvantaged farmers and ranchers. They will concentrate all of their resources on large deals that allow them to place a maximum amount of credit with one borrower. While this type of lending will be the most efficient for them to undertake, we strongly question if this is appropriate for a GSE.
NATIONAL CHARTERS RAISE SERIOUS SAFETY AND SOUNDNESS CONCERNS AND EXPOSE THE AMERICAN TAXPAYER TO ADDITIONAL RISK
The FCA has a checkered past with respect to monitoring and supervising expanded activities. After recklessly expanding in the 1970's and 1980's, the System required a $4 billion line of credit from American taxpayers in 1987 in order to avoid a complete collapse. Aggressive expansion into new activities by System institutions that lacked adequate experience, combined with the failure of the regulator to vigorously oversee such expansion, are widely agreed to be two of the major reasons why the System failed in 1987. These safety and soundness concerns are especially significant when, as under this initiative, there is no limitation on entry into new markets either by commodity or geography.
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The FCA fails to examine the increased risks that are associated with a local lender venturing forth into new territories without a solid understanding of the new region's peculiarities. The FCA fails to establish a case for how national charters will alleviate the System's concentration in lending to a specific commodity. For example, a System institution in Ohio that lends to large hog operations would logically focus on large hog operations in Iowa and North Carolina. Instead of more diversity in commodity lending, we believe that the result will be a continued focus on the same commodities in other areas and an increased concentration in single commodity loan risk.
System institutions are also jointly and severally liable to each other as a safeguard against System-wide failure. History, however, has proven that joint and several liability is at best a weak defense. A conservatively managed institution that has been subjected to ruthless competition within the System will not want to provide hard-earned capital to an association that has gotten into trouble because of reckless lending. Once System institutions are called on to support each other with capital infusions, a wave of litigation will overwhelm the fragile system of joint and several liability, just as it ultimately did in the 1980's. This scenario presents a significant risk to the American taxpayer because the last line of defense is another Federal bailout.
THE FCA IS ABANDONING COOPERATIVE PRINCIPLES WITH NATIONAL CHARTERS
The creation of the FCS as a member owned cooperative was a brilliant stroke on the part of Congress in 1916. Who else but the farmers and ranchers that had a stake in the System's success could better govern and manage the activities of the System? The participation and ownership of farmer- and rancher-borrowers in the management, control, and ownership of the System was central to its mission. As of June 30, 2000 the System had over 425,000 stockholder-owners.
To better understand and to gain some perspective on the nature of a cooperative, we consulted the seven Cooperative Principles as outlined by the International Cooperative Alliance. International Cooperative Alliance Rules, Policies, Procedures, and Standing Orders, Section II, Article 5 (November 1997)
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By proposing to grant national charters to System institutions, it is clear that the FCA is abandoning the basic cooperative principles of member ownership and member control. The second, third, fourth and seventh Principles each mention the concept of democratic member control of a cooperative. Id
Yet, the FCA does not require in its proposed rule that the 425,000 owners of the FCS vote on the question of whether their institution should apply for a national charter.
In fact, the Farm Credit Act of 1971 (act) requires System institutions to assure representation from all areas of its territory and as nearly as possible from all types of agriculture practiced within the area. 12 USCA 2203
The proposed rule does not modify these requirements in any way. Since these requirements would apply to a System institution's LSA, as the board structure of an institution changes to accommodate both geographic and agricultural diversity, control of the producer-owners located in an institution's LSA will be diluted. Furthermore, it is questionable whether such minimal involvement in the operations of an association rises to the level of ''shareholder control.'' Therefore, all System institutions seeking a national charter should be required to put the issue to a vote of that institution's farmer- and rancher-owners.
In summary, we believe that national charters will translate into new safety and soundness risks as System institutions venture into territories in which they are inadequately prepared to manage risk. We believe that the FCA has failed to adequately assess the potential for such problems. Agricultural lending is very much a ''place based'' business that is best understood and managed locally. We also question the ability of the FCA to conduct thorough safety and soundness examinations and accurately assess whether a System institution is adequately serving their local service area and meeting the credit needs of all farmers and ranchers and not just those of the larger, wealthier operators. Finally, we question whom the FCA is working to benefit, because there has been no call for national charters among the 425,000 owner/stockholders of the System.
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The FCS was created at a time when there were limited choices for credit for American agriculture. Since its creation in 1916, agriculture and agricultural credit have changed greatly. Today my customers have nearly unlimited access to a wide variety of credit opportunities. I have been an agricultural banker for 29 years and I have never before seen the level of competition that exists today for agricultural credits. Seed companies, equipment manufacturers, fertilizer producers, life insurance companies, and foreign banks are aggressive providers of agricultural credit. The fact that these options exist raises the question of why the American public should remain on the hook for the reckless activities of a retail lending, tax advantaged GSE that has clearly targeted its lending activities to benefit a chosen group of larger, wealthier farmers and ranchers. Given their track record of unsafe and unsound lending in the past, and the lack of enforcement on the part of their regulator, we urge Congress to stop this process before it is too late. However, should Congress allow this process to proceed, the FCA should adopt specific limitations on lending activities by System institutions outside of their LSA and System institutions should be required to submit to their farmer- and rancher-owners the question of whether they should apply for a national charter.
ABA member banks provide more credit to American farmers and ranchers than any other group of lenders. Our members have committed billions of dollars to the industry. We helped to restructure the agricultural economy after the 1980's and we want to take every necessary step to ensure that we never revisit those terrible times again. Thank you for your interest in this issue and I would be happy to answer any questions.
Statement of Ann Jorgensen
Mr. Chairman and members of the committee, I appreciate the opportunity to appear before the House Agriculture Committee today, and to submit the following statement on National Charters for the hearing record.
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Based on the extensive information I have to date, I strongly support the removal of geographical restrictions within the Farm Credit System (FCS/System). And, I believe the Farm Credit Administration (FCA) has the existing statutory authority to issue and amend charters including granting nationwide charters.
Mr. Chairman, my decision to support the removal of these artificial boundaries did not come easily or quickly. Since I came to FCA, more than 3 1/2 years ago, I have studied this issue and listened to and reviewed the input from Congress, farmers and ranchers, the System, various banking representatives, industry experts, and other interested parties. I highly value and respect this input. While I remain open to options, given what I have learned thus far, I think this initiative is a necessary step in maintaining an adequate and viable Farm Credit System in good times and bad for today's farmers, ranchers and rural America, as well as for future generations.
I believe the FCS, as a Government Sponsored Enterprise (GSE), fulfills a vital need in maintaining a competitive agricultural credit market. The System ensures eligible and creditworthy borrowers access to the best competitive rates possible for financing as well as a wide array of services.
Agriculture and the financial services industries are changing rapidly-driven by dramatic changes in technology, business structures, and the markets. There is no question this evolution is occurring and it is occurring quickly. Farmers and ranchers are responding and transforming their operations, as are the financial institutions. Farmers and ranchers and rural areas should have the same opportunities as the rest of America to access modern financial services, and the FCS must be allowed to adapt to meet these needs.
As financial institutions transform themselves, e-commerce will play an ever-increasing role. National Charters will allow the FCS to participate in this revolution. With nationwide charters, farmers and ranchers will be able to conduct business over the Internet and choose to borrow from an institution where cost structures, business philosophy, products and System institution expertise best meet their individual needs. I believe the demand to conduct business over the Internet from the agriculture sector will continue to increase rapidly. If the FCS is to remain an efficient source of credit for agriculture, nationwide charters are critical to the associations' ability to meet their customers' demands.
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As a regulator, I view the safety and soundness of the System to be my most fundamental responsibility. I want to emphasize that National Charters will not provide new or additional lending authorities to the FCS. However, they will allow System institutions to better manage risks. The FCS associations should be given greater opportunity to diversify commodity and geographical concentration risks, which will in turn, strengthen the safety and soundness of the System.
Safety and soundness is also improved through the FCA Board's recently proposed rule for National Charter applications. FCA is enhancing its due diligence process by establishing evaluative criteria and standards to review National Charter applications.
Associations will be required to revise their business plans before they access new markets. They will be required to adopt new goals and strategies. They must have demonstrated strong risk bearing capacities-both from a financial and management standpoint. The FCA Office of Examination will review these plans and give input prior to the FCA Board's decision on each charter application. During the examination process, staff will also evaluate whether the association has complied with their previously stated goals.
In addition to safety and soundness, it is important that the System meets its public policy mission. Before granting a National Charter, FCA will require an institution to create a plan to adequately serve eligible and creditworthy customers in its local service area (LSA). I do not believe associations will pursue unlimited growth outside of their LSA in part due to regulatory constraints on capital. Associations are currently owned and controlled by local farmers and ranchers; therefore, their future lending plans will also be controlled by the local stockholders. Furthermore, the rule requires associations with national charters to disclose in its annual report information about the volume of loans, leases and related services both inside and outside its LSA.
As part of its public policy mission, associations must also demonstrate that they have implemented a program for serving young, beginning and small farmers.
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I do want to add that I feel strongly that associations know their customers' needs best and they should build their plans based on those needs. However, let me assure you FCA staff will continue to review each FCS association's plan before and during the examination process to determine whether they have met their stated goals within the parameters set by FCA and within statutory limits. From my personal observation since joining FCA, I can attest to the fact that the agency is vigilant in its examination process.
Mr. Chairman, in conclusion, I firmly believe removing geographical restrictions to allow our farmers and ranchers to choose the institution with which they conduct business is the right thing to do, especially given the rapid changes in e-commerce. Removing these geographical restrictions also will help ensure that the Farm Credit System remains viable to meet its statutory objective to provide adequate, sound and constructive credit to eligible and creditworthy farmers and ranchers in good times and bad. And, I believe FCA is taking the appropriate steps to help ensure the continuation of a safe and sound System while enhancing its public policy mission.
Again, thank you for allowing me to submit this statement for the record.
Testimony of Jerold Harris
Good morning Mr. Chairman and members of the committee. My name is Jerold Harris. I am president and chief executive officer of the Farm Credit Bank of Wichita. I am appearing today on behalf of the Farm Credit Council, the national trade association representing the institutions of the Farm Credit System.
The Farm Credit Bank of Wichita provides wholesale funding and services to 26 local Farm Credit lending associations in Kansas, Oklahoma, Colorado and New Mexico. We and our associations provide loans and related services to some 43,000 agricultural producers, rural residents, and agricultural businesses in these four states. The bank and its related associations are cooperatives, owned and governed by the farmers they serve. At year-end, we had nearly $5 billion invested in agriculture and rural communities.
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Mr. Chairman, before I address the subject of this hearing, I want to thank the subcommittee and the full Agriculture Committee for the support you all have demonstrated for American agriculture over the past several years. Without your continuing support, conditions in the rural economy would be dire. The additional assistance provided by Congress during this period has meant the difference between solvency and bankruptcy for many producers. We heartily support the assistance you have provided and urge you to continue to address the needs of agriculture while markets remain depressed.
Thank you very much, Mr. Chairman, for calling this hearing. We welcome the opportunity to come before the Committee and talk about what we are doing to improve our service to farmers and ranchers. The Farm Credit System is chartered by Congress for a very specific reason—to serve agriculture. Our mission is set out clearly in the Farm Credit Act. Farm Credit is to provide a cooperatively owned and controlled ''permanent system of credit for agriculture which will be responsive to the credit needs of all types of agricultural producers having a basis for credit.'' To accomplish this mission, we are expected to keep the institutions of the System modern, efficient and competitive. We are expected to provide farmers and ranchers a choice amongst lenders, and we must have the wherewithal to be a reliable source of credit able to serve all types of farmers in good times and bad.
You know all too well, Mr. Chairman, what can happen if we fail to keep the practices and operations of the System up to date. You also know that since the 1980's Farm Credit has accomplished its mission effectively while rebuilding its capital base and ensuring that all past financial assistance is repaid. While we recognize that some of our competitors would delight in the System no longer being an active player in the marketplace, we know that agriculture would be ill-served with that result.
The current service territory limitations under which Farm Credit associations operate date back to the 1920's. The regulator at that time made an administrative decision that agriculture as it existed then would be best served by institutions with limited service territories. Back then, a farmer's geographic location—where they lived and farmed—was the determining factor in their choice of a lending institution. Needless to say, eighty years has brought a lot of changes to agriculture and to the financial services industry.
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Today, farmers buy inputs from, gather information from, and market their products to entities all over the globe. The Internet provides them instantaneous access to a global marketplace. Globalization has brought with it the promise of expanded markets and the challenge of global competition. And yet the farmer-owners of the Farm Credit System have seen their lending institutions remain geographically challenged in a global economy that knows no geographic limitations. At a time when the internet has wiped out boundaries and borders, the farmers who want to use the cooperative Farm Credit System face geographic hurdles if they want to access financing from a System institution other than the one that is specifically authorized to serve their location. They face arbitrary and outdated restrictions that no longer make sense in our modern world.
To their credit, the Farm Credit Administration recognized this situation and came to the conclusion that it was time that the administrative decision made some 80 years ago be reversed and that System institutions no longer be limited by specific geographic boundaries. A lot has been made of the fact that FCA originally proposed this change without undertaking a formal rulemaking. While legal scholars can debate that issue, we need not waste time here this morning on it. FCA has proposed a formal rulemaking and the public now has the opportunity to comment on it.
The Farm Credit Act provides FCA the responsibility and authority to grant and amend charters for Farm Credit institutions. As part of its comments to the FCA on the National Charter booklet, the Farm Credit Council sought and obtained a legal analysis of the agency's authority to issue national charters to FCS lenders. We would be happy to make that available to the Committee for your consideration.
FCA's proposed regulation will provide farmers and ranchers with the opportunity to choose the Farm Credit System institution that best meets their credit needs. The proposed regulation sets out the process that a System institution must follow if it desires to obtain a national charter or something less than a national charter. That process includes specific requirements that an institution must meet before it can obtain an expanded geographical service area.
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The agency has clearly responded to those who believe we will abandon our currently chartered territories and seek greener pastures elsewhere. They have put in place a requirement that we give preference to serving customers in our current territory by designating that territory as our ''local service area.'' They are suggesting that we provide them significant information regarding how we are serving that area today, who might be underserved there today and what our plan would be to meet there needs, prior to them providing any change in our service territory.
Modern agriculture has grown more complex and specialized. So too, have the financial institutions that serve it. Even a territory that is perceived as homogeneous as our four states is home to wildly divergent agricultural operations. Each of these operations needs a lender that understands its individual financial needs and has the capacity to fully serve them. Building the expertise to serve these varying enterprises is the challenge facing all agricultural lenders today.
Different financial institutions manage this challenge differently. Boards and management teams structure their institutions to serve their markets as they see them. Expertise, capacity and desire to serve various market segments are unique in every financial institution. Farmers and agricultural businesses fighting to innovate and succeed cannot afford to be stuck with a lender ill-equipped to help them win that fight.
Farm Credit institutions have few alternatives today as they work to build the capacity to serve evolving agriculture. Tied to a specific geographic territory, these institutions are forced to merge with others in order to stay competitive. Mergers however, limit farmers' choices. National charters are an alternative to mergers, offering Farm Credit institutions the opportunity to build capacity to serve without merging.
National charters will ensure that farmers and agribusinesses have access to the broadest range of lenders. The national charter regulation will provide farmers and agribusinesses with a choice of lenders to best meet their needs.
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Farm Credit System lenders are limited to serving agriculture and rural communities. As essentially ''single-sector lenders,'' Farm Credit institutions face concentrated risk. Unlike other lenders, Farm Credit cannot move away from agriculture when the farm economy softens. We are committed, both by law and inclination, to serving agriculture and rural America in good times and bad. We work every day to mitigate the risk inherent in single sector lending.
Farm Credit's single sector risk is further concentrated in many cases by geographic risk. An institution can find itself facing a territory-wide drought or similar agriculture catastrophe. By moving beyond local geography, Farm Credit institutions can alleviate some of this geographic risk.
We recognize that extending loans in unfamiliar territory can pose risks as well. However, effective management, strong regulatory oversight, and the benefits of geographic diversification more than offset those risks. Today, several Farm Credit institutions serve multiple states. While our competitors complain that we are too aggressive in serving the marketplace, Farm Credit is hardly the dominant lender in our four state area. We are meeting our mission of service to agriculture and building the financial strength to enable us to continue to meet our mission in the future.
The Farm Credit Administration has demonstrated that they are fully capable of examining multi-state institutions. FCA is a full-fledged safety and soundness regulator with the full breadth of authorities necessary to oversee System operations and to take enforcement actions should they be necessary. In addition, Farm Credit institutions are subjected to specific, risk-based capital requirements. As of September 30, 2000, capital as a percentage of total assets in the System equaled 15.5 percent.
Unique among GSEs, the Farm Credit System has a self-funded insurance fund that is in place protecting investors and, ultimately, the taxpayers. System institutions have paid premiums to build it to the congressionally mandated secure base amount of 2 percent of outstanding debt.
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National charters will not change the cooperative nature of Farm Credit institutions. They will continue to operate on the concept of one stockholder, one vote. Farm Credit institutions will continue to be owned and controlled by their member/customers. Farmer control will remain a fundamental principle of Farm Credit.
No institution is being required to adopt a national charter. The decision to do so will be made by each institution's board of directors based on their own analysis as to what is best for their institution as they seek to serve agriculture.
An institution that receives a national charter would be required to amend its current business plan to ensure that, first and foremost, it will provide loans and financially related services to the customers in its originally chartered or local service area. The conditions of the national charter set forth in the proposed regulation would require an institution to recognize and act on its obligation to serve all eligible borrowers in its local service area.
Before initiating activities in a broader geographic area, a Farm Credit institution is required to submit a revised business plan, approved by the institution's board of directors, which clearly demonstrates how the institution will operate outside its current territory. The plan must give special attention to how the institution will maintain safe and sound operations.
Today, System institutions serve the many diverse entities that comprise U.S. agriculture, including larger-sized farmers and smaller-sized farm operators and everything in-between. Farm Credit will continue to be responsive to the credit needs of all types of agricultural producers just as we are doing today.
Reviewing FCA's data on the System's service to young, beginning and small-sized farm operators demonstrates what Farm Credit is doing to serve these groups. The last available comprehensive data gathered by FCA is from 1999. That data shows that Farm Credit made $7.3 billion in loans that will benefit young farmers, $10.7 billion that will benefit beginning farmers and $20.6 billion that will benefit small farmers.
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National charters will not change who is eligible to get a loan from Farm Credit. The national charter regulation will provide no new lending authority for FCS institutions. The competitive balance between Farm Credit and commercial banks will not be altered by this regulation. It is important to remember that commercial banks have done very well competing in agricultural credit markets. According to the U.S. Department of Agriculture, commercial banks have gained market share in agricultural credit markets in 12 of the last 15 years.
In fact, Mr. Chairman, we would urge this committee to continue to focus on changes that need to be made to help modernize the Farm Credit System. Commercial banks have had many new opportunities opened up for them as a result of the Gramm-Leach-Bliley financial services reform legislation. That legislation gave the majority of commercial banks (and virtually all agricultural banks) direct access to GSE funding through the Federal Home Loan Bank System for all types of agricultural lending. As a result commercial banks today:
benefit from access to the same GSE funding as Farm Credit,
have a depository based, funds gathering mechanism directly backed by the taxpayers,
have access to the Federal Reserve funding window that Farm Credit does not enjoy,
have greater operating flexibility than Farm Credit institutions,
are not subject to statutory borrower rights requirements (as are System institutions),
have a lower cost of regulation,
have substantially expanded their agricultural loan market share,
have experienced high profit levels, and
have failed to return any of those profits to their borrowers through patronage programs.
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Mr. Chairman, thank you for the opportunity to testify today. We strongly support the FCA's proposed regulation. We believe it provides more choices for farmers; helps diversify risk in Farm Credit institutions; and helps preserve Farm Credit's cooperative structure. Importantly, we note that the FCA action does not alter the competitive balance between Farm Credit and commercial banks and is fully authorized by law.
I would be pleased to answer any questions the committee might have.
Statement of John Dean
FCA NATIONAL CHARTER PROPOSAL
Thank you. Chairman Lucas, we appreciate the House Agriculture Committee and particularly the members of your subcommittee conducting this hearing today. My name is John Dean and I currently serve on ICBA's Agriculture-Rural America Committee. I am also the Chairman and CEO of Glenwood State Bank, Glenwood Iowa. Glenwood is a community of 4,000 population, located in Mills county, which has a population of 13,000 people. Glenwood State bank is an $80 million asset bank.
The agricultural economy is extremely important to us and we appreciate that this committee has played an instrumental role in providing emergency farm aid packages the past three years. ICBA lobbied for passage of these farm aid packages because we believe they have been necessary to keep many of our farm customers afloat. And we urge the committee to pass a farm aid package again this year, similar in size to the package passed last year.
ICBA—COMMUNITY BANKS MEETING THE NEEDS OF RURAL AMERICA
Mr. Chairman, the ICBA, with two-thirds of our member banks located in small communities of under 10,000 population, has a long standing interest in ensuring credit availability to our nation's farmers, small businessmen and women and other credit consumers in our nation's rural communities.
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ICBA is the only national trade organization that exclusively represents the interests of our nation's community banks, representing 5,300 institutions at more than 17,000 locations nationwide. Community banks are independently owned and operated and are characterized by attention to customer service, lower fees and small business, agricultural and consumer lending. Our member banks employ 239,000 citizens in the communities they serve.
WE AGREE WITH MANY IN THE FCS—NATIONAL CHARTERS ARE BAD PUBLIC POLICY.
Mr. Chairman, the old perception that bankers and the Farm Credit System can't agree on anything is not true. We agree with the many FCS who opposed this proposal and the reverse is true as well—they agree with us. We reviewed several dozen letters in the comment file where FCS associations expressed concerns. I ask that a number of their letters be included in the hearing record.
These FCS objections are not limited to isolated complaints raised in a self-serving fashion. Their concerns go to the heart of debate today. Issues include forced mergers, closures, and muscling out of local markets by larger associations trying to take over the System and become anything but locally based lending institutions. My testimony today will emphasize some of these many points of agreement that we share with these FCS associations in opposition to removing geographical boundaries and allowing intra-system competition within this GSE—the only GSE that would have such an arrangement.
The opposing FCS associations expressed concerns that this new direction is a dramatic change in the FCS that would benefit only the large FCS lenders. They argue it would hurt the cooperative nature of the FCS and undermine service to family farmers. They further argue it is simply a way for large FCS associations, that had not adequately serviced their existing
geographical territories, to cherry-pick the best loans away from other lenders.
In fact, one Farm Credit System association wrote that in their Farm Credit District a survey showed ''that more than a majority of the associations are opposed to the 'National Charter' approach.'' Also, based on contacts their management had with association representatives across the country, quote, ''we find support is 'luke warm' and only exists at all primarily due to the belief that this is the only approach which FCA will support.''
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FCA wants to allow only a 30 day public comment period. With such major policy implications, why is a 30 day comment period sufficient? Clearly the evidence is this proposal has not been embraced enthusiastically except by a few and it has generated many concerns and questions.
What are some of the points of our agreement with FCS institutions on why National Charters are bad public policy? The bottom line for both banks and many FCS institutions, based on their written comments, is that there are much simpler, much easier, less disruptive and less painful ways to achieve what the proponents of the proposal say are their main objectives. That FCA doesn't embrace simpler, less disruptive solutions, suggests the stated objectives are not the primary objectives for this proposal, which greatly concerns us.
One initial point to consider is that there is little, if any, need for this proposal. In fact, I would like to submit for the record the arguments proponents of national charters have stated—all of them you will see refuted by FCS associations themselves!
Let me summarize a partial list of concerns:
1. This proposal will not enhance service to family farmers—it is designed to appeal to large borrowers!
2. In addition, it will do nothing to provide loans to struggling borrowers who cannot now find credit.
3. It is likely to lead to much greater consolidation of FCS local lenders and therefore a greater concentration of economic power among fewer, larger FCS lenders at a time when many have raised concerns over concentration of America's farms and agri-businesses.
4. The proposal is unnecessary—there are much simpler, less disruptive ways to achieve the proposal's stated goals;
5. The proposal is driven by the large institutions within the FCS who will have the financial leverage and resources to drive smaller FCS associations out of business while driving some commercial banks either out of ag lending or out of business;
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6. The proposal could undermine the majority of farmer-borrowers now using the System and lead to a loss of local, farmer-oriented control;
7. The proposal will likely disrupt rural credit markets and in many cases could make credit more expensive to family farmers;
8. The proposal is controversial and not enthusiastically embraced within the Farm Credit System;
9. The proposal will lead to a crowding out of private sector lenders in markets that are already competitive, well served and efficient;
10. The proposal will further open the door to a focus on non-agricultural lending by the FCS.
NOT A CUSTOMER CHOICE ISSUE
When this proposal was originally presented by FCA a couple years ago it was labeled ''customer choice''. The argument then for removing geographical boundaries was supposedly that large farm customers, with operations in more than one state, were prevented for shopping for their choice of FCS lenders. This was not true then nor is it true now. As pointed out by FCS associations, FCS associations typically grant concurrence for such loans routinely and many
have reciprocal territory concurrence agreements in place which ensures the customer has lender choices.
NOT A DIVERSIFICATION ISSUE
As of late, the most often cited argument made by proponents is that the proposal will allow the System to reduce risks by being able to diversify across territories and across commodities. But the System can already do this through loan participations. Participations are loan sharing arrangements where the association originating the loan can share in the profits (or losses) of the shared loans with another association. These participations can be done anywhere in the U.S. and have the added advantage of relying on the local association's knowledge of the customer base and various risk factors inherent in that particular geographic region.
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Relying on loan participations would be far less risky and far less disruptive than causing the loss of many local lenders from serving agriculture.
In addition, the USDA has loan guarantee programs and Farmer Mac has a secondary market program to purchase loans. Both of these are in place to help lenders reduce risks. Yet, USDA economists report that FCS has not utilized the USDA loan guarantee programs to serve beginning, socially disadvantaged or higher risk farmers anywhere near the level that commercial banks have. I ask that this attachment also be entered into the hearing record.
The bottom line is that there are already several mechanisms in place to reduce risks for System lenders. It appears, however, that they are not utilizing these programs.
This raises the question Mr. Chairman, why adopt this proposal when FCS institutions are currently underutilizing existing risk reduction mechanisms?
WILL INCREASE—NOT DECREASE—SAFETY AND SOUNDNESS RISKS
FCA and other proponents argue the proposal will, due to greater diversity of loan portfolios and territories, reduce safety and soundness risks. At the same time, proponents completely ignore other risks that result from venturing into unfamiliar geographic areas and lending on commodities and in climates where they have little, if any, previous lending experience.
An important question is why it makes sense for associations to compete when competing associations are jointly and severally liable for each other's failures?
The board of one FCA association wrote they had ''concerns about how the FCA would maintain safety and soundness control of the lending and operational risks the System entities might pursue. These risks could develop to such a scope and scale as to trigger losses that would impact the remainder of the System institutions.''
Another association wrote, ''Agriculture can be very volatile and one needs to understand the borrower's operation in order to understand the risks. We have seen too often where the efforts to build an agriculture loan portfolio by offering low market rates or easy credit terms and conditions have led to problem loans, risky portfolios and failed farming operations.''
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Another FCS association representative wrote, ''I firmly believe we should not put our capital at risk by venturing into areas or industries where we do not have the resources or expertise to properly service the business.'' Yet another FCS association wrote, ''Internal competition cannot be policed by FCA or the System itself and may well lead to the System's failure, rather than
guaranteeing its success.''
Another FCS association representative wrote, ''Better rates and better terms, etc., will only occur if one of the competing System entities is willing to earn less than the market would dictate. Therefore, we are extremely uneasy with the proposal to engage in a free-for-all among System institutions in this extremely competitive environment. In our opinion, this is a classic safety and soundness issue, which puts member investment in System institutions at risk.''
Further, FCA has stated that risks will be controlled through FCA examinations and their authority to correct deficiencies. But the FCA only conducts examinations of institutions once every 18 months and no longer requires prior approval of new product offerings. It does little good to shut the gate once the cows have gotten out.
In fact, one FCS association wrote, ''We are convinced of the following: the safety and soundness risks of the proposed intra-System competition are being totally ignored.'' Another wrote, ''We do not believe that the Farm Credit Administration has the ability to regulate Associations with nation-wide charters; and, will lead to Safety and Soundness concerns when Associations start lending in areas in which they have little expertise.''
WILL HURT—NOT HELP—FAMILY FARMERS
FCA has stated that this proposal will help family farmers. In fact, they have said it will help all family farmers. Really? Not according to the many FCS associations who feel forced to apply for national charters to remain on the same competitive playing field as their FCS brethren. These
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associations believe, and we concur, that more profitable farmers in more profitable geographic areas will be targeted because the smaller loans will not be viewed as cost efficient. In fact, they have pointed out that in those territories where there is already limited overchartering of FCS
territories this is precisely what is NOW occurring.
Some of their comments are: ''Open competition may cause FCS to only serve more profitable geographic areas or commodities and avoid areas that are not as profitable or desirable.''
''Intra-system competition is for only large loans—Associations are only interested in soliciting large out-of-territory loans that have adequate volume to cover the extra expense of handling and will contribute towards association efficiency (cost per dollar loaned). There will not be any competition for the smaller loans, as they are not cost efficient.''
''We conclude that the principal reason for the new philosophy is to create the necessity for associations to merge. We do not believe such mergers will improve service to our customers.''
''Competition for the large loans will result in reduced interest rate spreads for these loans, and an offsetting increase on small and marginal loans.''
''Even with the LSA requirements (Emphasis added), a likely result over time will be for associations to place less emphasis and focus on smaller, less profitable loans in marginal agricultural areas, and increase efforts in areas with stronger agriculture and larger, more profitable loans.''
''There is no valid argument that supports the claim that a competing association is going to seek to expand their young, beginning, small and minority program outside their local service territory (LSA). No, the loans being sought will be only the large, high quality accounts ('cherry picking').''
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''Please re-consider this philosophy statement and see it's negative impact to agricultural borrowers. Who will finance the young farmers of tomorrow? Someone down the street might, but no one across the Nation is going to give the first consideration. All of us will go after the same operators and when the holes in financing agriculture develop, we will be too fragmented to fix. Let's please look at alternatives for the customer's sake, not for the sake of District banks or associations.''
''Unfortunately, the removal of boundaries could result in fewer Associations due to intra-System competition and therefore, lead to higher interest rates over time (emphasis added). Obviously, this would not be beneficial for our customers.''
''The basis for opposition centers primarily on the possibility that the small and/or marginal customers the system is to serve will be adversely affected by the proposal.''
''Young, beginning, small and minority customers will be underserved in the rush to compete for larger, more profitable loans. This would be in direct conflict with congressional intent and FCA's own regulations.''
Mr. Chairman, it is inconceivable that Congress wants to provide less help and poorer service to family farmers. But both sets of perspectives—that of the FCA and other supporters and that of FCS associations opposed to this proposal—can't be correct. They are mutually exclusive viewpoints. We are not simply speculating here—it is a matter of basic economics. Family
farmers will not be targeted by out of territory lenders under this proposal because it will cost more to underwrite, service and monitor loans that could be many states away from the originating lender.
They certainly won't be going after the less viable credits. The ultimate consequence of this isn't better service, it's the potential for fewer credit choices and poorer service. To be viable, local lenders must be able to lend to a broad cross section of constituents in their market. They can't be profitable lending only to the marginal or less profitable customers. But this is a prospect that many local lenders, including both local banks and local FCS associations, would face since the large, aggressive FCS lenders would engage in predatory pricing to snatch away the better farm loans.
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FCA has shown little interest in policing predatory pricing tactics, another concern raised by both bankers and FCS associations and FCA is not implementing any new safeguards or oversight mechanisms in this area.
Local Service Area (LSA) Plans Are Insufficient To Guarantee Service to Family Farmers. The FCA has suggested that they would be able to guarantee, through LSA plans, that FCS lenders would continue to service their local territories before venturing into new territories and that this will ensure the new policy targets family farmers. But the LSAs are totally inadequate for several reasons. Let me mention a few of these reasons.
First, FCA does not require any targeting of young, beginning, socially disadvantaged or family farmers by the lenders venturing into new lending areas. So the focus on out of territory lending is totally geared to large credits. There are no requirements, no portfolio goals for example, that
struggling family farmers be the primary objective for venturing into new territories.
Second, the policy does nothing to increase service to these market segments—young, beginning, socially disadvantaged or family farmers—within existing territories by the ''local'' FCS lender. It only requires a plan be in place but provides no criteria for the plan, meaning ''business as usual''. The new policy allows the associations to ''self-assess'' themselves as part of their application and report on how good of a job they feel they are doing in their local service areas. This amounts to self-assessment and self policing of their ongoing activities. Commercial lenders have to comply with much more stringent Community Reinvestment Act (CRA) requirements upon which they are examined, graded on and held accountable to transparent and public scrutiny.
There are also no requirements for increased use of the USDA guaranteed farm loan programs, for example. So we will see no improvement in the current situation in which bankers often complain that FCS associations ignore the higher risk credits and use their GSE tax and funding advantages to go after larger credits in their existing markets. Only self-assessments and self-evaluation.
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Third, there are no portfolio limitations on the amount of lending activities the associations can do outside of their territories. So if an FCS association is currently only marginally effective in serving its existing LSA, it could under this plan suggest it is doing a fine job in its LSA and commit a large portion of its resources to pursuing large credit deals in other areas. How much of their portfolios would FCS institutions be required to commit to the LSA under FCA's proposal? 95 percent? 90 percent? 80 percent? 70 percent? 60 percent? 50 percent? 40 percent? It's undefined and not even required in this proposal, so no one knows.
Fourth, these liberal LSAs will inevitably weaken even further over time as associations merge, causing confusion. LSAs will inevitably cover larger and larger geographic regions making them anything but ''local''. They certainly won't provide the local lending presence and local community presence that community banks provide. Plus, if an FCS association closes shop, what happens to its LSA? Will there no longer be any association obligated to serve the failed association's LSA?
Fifth, there is no requirement that the non-LSA FCS lenders be required to make a financial commitment to the community from where they are seeking loans. This will erode community involvement and community support from the LSA lender who will divert resources to fight the incoming competition from non-LSA lenders. Local communities will suffer. Rural communities will suffer.
Sixth, LSAs are not sufficient to keep FCS focused on its public policy mission. The System continually uses the banner titled ''modernization'' when it pushes for new powers. There has been quite a bit of ''modernizing'' within the FCS lately as evidenced by all of the new regulatory policies we've seen over the past few years. I want to emphasize that the System has been quite profitable as it is currently structured—generating over $1 billion in annual net profits for the past decade.
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Since other GSEs have social obligations, I suggest its time to ''modernize'' the System by mandating certain financial and/or portfolio obligations aimed at targeting young, beginning, socially disadvantaged and family farmers. Congress could mandate a certain, significant, percentage of FCS associations' loan portfolios or profits be committed to beginning farmers or socially disadvantaged farmers, for example. This could be a benefit to these market segments that may actually have the greatest need in American agriculture and would truly be a ''modernization'' that serves a valuable social purpose—a fundamental reason GSEs exist.
WILL ALLOW PREDATORY PRICING
Supporters in the FCS have suggested that this proposal will increase competition, which they suggest is the basis of banker complaints about the proposal. The latter is completely untrue as the supporters know. What they don't tell you is that the only increased competition will be for
the largest credits and the only way to get these larger credits is to underprice the market—to engage in predatory pricing.
Let me emphasize this—The booklet establishes no new monitoring and oversight mechanisms in regards to monitoring for predatory pricing even though considerable concern was expressed over this issue by FCS institutions. Section 12 U.S.C. 2001 Section 1.1 of the Farm Credit Act, which states what the congressional policies and objectives for FCS activities are concludes with this language:
''Provided, that in no case is any borrower to be charged a rate of interest that is below competitive market rates for similar loans made by private lenders to borrowers of equivalent credit-worthiness and access to alternative credit.''
Yet, FCA does not provide regulatory controls in this area to accompany their regulatory proposals which they always justify using Section 1.1 of the Act. There is nothing in this proposal to guard against large, aggressive FCS lenders engaging in predatory pricing. And this is an area of FCA regulations that has gotten little or no attention. It leads us to conclude this section of the Act may need legislative changes to require enforcement of these provisions. FCA should be conducting periodic surveys of FCS and competitors'' rates and making them available for public scrutiny.
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No Legitimate Economic, Cost-Benefit or Needs Analysis Has Been Conducted. FCA has admitted that they have not conducted a formal economic, cost-benefit or needs analysis of the impact of this proposal. With such dramatic changes possible and likely, one would think that would be required of FCA. All the FCA has said is that it has conducted various discussions and briefings. Mr. Chairman, the FCA certainly never contacted any community bankers to discuss needs, trends or how to better serve our rural communities. Perhaps Congress and the public should be able to see the options FCA studied.
Contrary to suggestions that the Treasury Department has somehow been involved in or endorsed the move towards removal of territorial boundaries within the FCS, I point out that is not the case. In a November 30, 2000 letter Treasury sent a letter to FCA Chairman Reyna making the following comments:
''First, we believe the proposal would reduce the focus of Farm Credit System associations focusing on serving all eligible borrowers in their local areas and diminish the System's local cooperative structure. Second, while not directly expanding the lending powers of the Farm Credit System associations, the proposal would likely allow a government-advantaged competitor to increase market share, which in the long term could effect competitiveness in agricultural credit markets . . . We have not undertaken a formal legal review of the charter proposal or the process by which it was done.''
In Treasury's October testimony to the House Banking Committee the Treasury Department noted several concerns including the following:
''Such a policy (national charters) raises serious questions about the proper mission of the System. . . such changes may also over time tend to diminish the local, cooperative nature of that System and have long-term effects on the competitiveness of the agricultural lending markets. In particular, they will allow expansion of a government sponsored enterprise—which are traditionally created to correct a market failure—at a time when markets are functioning competitively and even growing.''
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''We believe that the System's current structure is an important part of maintaining local focus. . . we did not recommend national charters or any form of intra-System competition. . . it might well diminish competition and innovation in the medium- to long-term by driving other competitors from the market.''
FCS disagrees with these points including the last point. But Treasury disagrees with FCA, which again, has not done a formal economic, cost-benefit or needs analysis. The Treasury Department is an impartial observer and their economic viewpoint suggested this is bad public policy. This is indeed an important issue that goes to heart of the competitive landscape in rural America.
National Charters Remove Local Control of FCS by Farmer Borrowers
FCA's booklet states that national charters ''provide more geographic diversification for selecting eligible stockholder directors'' (pg 2). This will lead to loss of local control of FCS association boards since potential board members will now be eligible from anywhere in the U.S.
Sample concerns expressed by FCS association include the following:
''we are totally opposed to the removal of geographic boundaries of system entities which would no doubt promote predatory pricing and loss of local control.''
''it (removal of geographic boundaries) would allow a segment of the system to use this statement as a self serving catalyst to create a political power base to control future system activities based on their own agenda, rather than the grass roots ownership and management teams currently existing.''
''FCA's new philosophy appears to direct changes not necessarily beneficial to the customer or end user, but more to affect internal politics, control, and breaking up what has been a most successful member-owned and controlled organization.''
''Our fear is that the mission mandated by the Congress to provide sound and constructive credit to all eligible borrowers may be sacrificed as we move away from the influence of localized governance through economies of size.''
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''Specifically, the (FCS Association) board questioned how farmer-director representation would be maintained in such an environment.''
''Intra-system competition at the association level will distort the ''grass roots'' representation by producing board representation motivated by salaries and perks rather than borrowers' needs.''
''we believe the process you have put into motion may cause the loss of local identity for associations and create large organizations that may not be responsive to local needs.''
''we fear the loss of grass roots control of the Farm Credit System. . .''.
Clearly many FCS association recognize that this policy will lead FCS away from locally controlled boards. In fact, FCA's proposal requires this dilution of local representation by allowing borrowers to serve as directors ''regardless of geographic location''. And each association will be required to ''ensure that borrowers from its chartered territory are adequately represented on its board of directors''. When chartered territories cover the entire nation, the governance of associations is anything but local.
Shifts FCS Away from Serving Agriculture. Finally, the committee should reject the scarecrow arguments. These are the arguments proponents have raised to mischaracterize the debate. These arguments are:
A—The proposal is necessary because FCS serves a single-sector;
B—FCS MUST serve agriculture in good times and bad;
C—FCS serves agriculture when ''other lenders can abandon agriculture in search of more profits elsewhere'';
D- The proposal doesn't allow for any new powers.
Why FCS Is Supposed To Serve A Single Sector: These arguments, of course, forget to note that FCS was given GSE privileges precisely because they are intended to serve a specific sector—agriculture—at a time early in the 20th century when there were some financing gaps in agriculture.
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Also, bankers have noted that in recent years the FCA has begun to talk about its mission not only in terms of serving agriculture, but in terms of serving ''rural America''. That is quite a leap. In fact, the FCA a couple of years ago proposed a broad ''scope and eligibility'' proposal which included allowing loans to be made to farmers and agri-businesses for both farm and non-farm purposes.
Although that proposal was eventually scaled back somewhat after numerous complaints, it is clear that FCA has been expanding FCS's activities into non-farm lending areas. These include providing mutual funds, credit cards, student loans, home equity loans which can be used for any purpose, vacation loans, loans to dentists and anesthesiologists for recreational purposes, and on and on. My point, Mr. Chairman, is that this argument of ''being limited to a single sector'' has worn quite thin and it is clear that FCA wants to push the expanded powers envelope even further in the future.
Why the Proposal Grants New Powers & New Activities: FCS says there are no new powers here. But National charters pave the way for future alliances with nationally based businesses targeting the vague category of ''rural America.'' For example, will FCS and FCA agree to legislation limiting these charters to only serving family farmers?
Where will national charters lead? Will CoBank, working through its direct lender associations, or will other FCS associations, form national alliances with national car companies to provide consumer auto financing for Ford or GM cars in towns of under 50,000 population? What about financing all the consumer loans for Home Depot home remodeling projects in ''rural'' towns? What about teaming up with national businesses to provide financing for furniture sales, office equipment, computers, and so on if they serve ''rural America''. What is in place to prevent this under a future FCA eligibility proposal, or even without one? What major national business wouldn't want to align themselves with the benefits of a GSE lender? What credit demand would FCS be providing that is not being well met now by private sector lenders?
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Again, FCA says this, and let me emphasize the word, THIS, proposal doesn't provide any NEW POWERS. They don't tell you it facilitates NEW ACTIVITIES. And they don't tell you that combined with other recent regulatory actions, such as 100 percent loan participations and allowing farm credit banks to issue class A cumulative preferred stock, large FCS institutions will be able to easily form alliances with major national companies using GSE advantages, cheap financing and the implicit backing of taxpayers.
Again, will FCA and FCS support legislation that prohibits national charters from applying to large national businesses, both farm and non-farm? FCS says it won't facilitate the concentration of economic power, that the proposal is somehow neutral. How can that be when it fosters these national alliances with big businesses at the expense of Main Street?
Does Only FCS Serve Agriculture In Tough Times?: In regards to ''other lenders abandoning farmers'', let me state that this is simply misleading because it ignores the fact that there are several thousand commercial banks that provide financing to agriculture. In many of our communities our community banks could not exist without the agriculture sector because it is the largest segment of our loan portfolios.
In most communities there are several community banks competing for the same business in addition to other competitors. Since community banks like ours serve their communities my bank is not going to go ''seek profit opportunities elsewhere'' by leaving our community in tough times. And by the way, my regulator would frown upon me as an Iowa community banker if I started to make loans in California and Florida and New Jersey simply by editing or updating an annual business plan. And of course, even as a community banker serving the needs of my community, I am still required to comply with CRA.
The ''scarecrow'' arguments supposedly rationalizing FCA's proposal lack merit because:
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A—FCS was given tax advantages and access to cheap funds as a GSE PRECISELY because they were created to serve a single sector—agriculture.
B—Don't forget FCS lenders get to choose who they lend to in agriculture.
C—Community banks can't abandon agriculture in tough times. We serve our communities and get graded on CRA—which is publicly available by the way.
D—The proposal allows an unlimited variety of ''new activities'' implicitly granting new powers not currently allowed due to territorial boundaries.
FCA/FCS'S TERRIBLE OFI RECORD
Mr. Chairman, I want to simply point out that the FCA and the FCS, despite all the talk about wanting more competition, have a terrible record for implementing the Other Financial Institutions (OFI) program intended by Congress to allow banks, credit unions, and other groups to access the funding window of the FCS. This would be one positive way more credit could be made available to rural America. But today there are only two dozen OFIs even in existence even though the statutory authority has existed for many decades. The OFIs that do exist get no board representation, no policy input and FCA has not responded to our request to host a meeting of OFIs to gather input and begin developing a workable program.
Congress expected the OFI program would be a significant, substantive program when it passed the authorities. It is time Congress prod the FCA to revise this program and we can share a number of ideas in this regard. But we shouldn't let the FCA proceed with national chartering unless they address the concerns we have raised today and until they have taken care of something as fundamental as the OFI program to ensure more credit is available from other providers when their association numbers become drastically reduced.
I believe its easy to see that the FCA National Chartering proposal is fraught with problems. It dramatically changes the structure of the System, will lead to rapid consolidation and loss of local control within the System, will encourage predatory pricing with no controls in place to monitor these practices and will lead to large aggressive FCS lenders cherry picking the best loans with no targeting requirements to serve family farmers outside their LSAs. The proposal has a weak and liberal local service area requirement that will become anything but ''local'' and could lead to alliances with large commercial businesses for non-farm lending purposes.
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None of the borrowers served by the FCA's plan lack adequate credit choices. The rural credit market is quite competitive with a number of creditors in addition to the FCS and banks vying for business. We don't need to have larger operators and large ag businesses getting special loan deals that will be offset by raising interest rates on smaller borrowers. I've outlined a number of concerns. There are also many questions as I've indicated.
Additional questions would be:
Why the FCA doesn't equalize voting procedures for stockholders of all associations consistent with the voting requirements being put in place in Mississippi, Alabama, New Mexico and Louisiana?
How can an association's charter expand to a national scope without affecting the charter or district boundaries of the district bank with which it is affiliated?
How can an association have the obligation to provide service to only a small part of its chartered territory?
Since this policy will lead to rapid consolidation and mergers of FCS associations, with national charters soon to be in place, how can FCA comply with 12 U.S.C. 2252, Sec. 5.17 (a)(2)(A) requirements that ''where stockholders of one or more associations did not approve the merger, the charter of the new or merged association shall not include the territory of the disagreeing association or associations?''
If an association is unable to survive and closes down, will there be an association obligated to served the failed association's LSA?
It would be easy to expand the lists of both the questions and the concerns, but I believe the point is clear—FCA should withdraw their proposal and consider less disruptive options.. We believe the committee should prohibit this proposed rule, and we certainly would be glad to immediately enter into discussions with FCA, FCS and this committee and your staff on ways to achieve customer choice and diversification across geography and crops without harming family farmers and disrupting rural credit markets as this proposal clearly does.
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Thank you Mr. Chairman
Testimony of Ed Hester
Mr. Chairman and members of the committee, my name is Ed Hester. I am the chairman of the Federal Land Bank Association of North Mississippi, FLCA and am testifying today on behalf of all the Federal Land Credit Associations in Louisiana, Mississippi and Alabama. Collectively, we represent over 5,700 stockholders and over $1.7 billion in outstanding loan volume.
We would like to take this opportunity to respond to issues that some have raised regarding the 1992 amendments to the law and how these provisions pertain to the national charter regulation. We are pleased that FCA has recognized these provisions in terms of providing a stockholder vote in the states of Louisiana, Alabama, and Mississippi before a national charter can be issued in these states.
We have a unique situation in my part of the country, Mr. Chairman, and it needs to be treated differently (as FCA has proposed).
In the late 1980's, as you may recall, when the Farm Credit System needed Federal financial assistance, the lending institution in this three-State region went into (what is called) receivership—where the Federal regulator (FCA) had to step in and take over. The assets were sold to the highest bidder, which was the Farm Credit Bank of Texas, who stepped up to the plate and took a financial risk in purchasing the loans of a failed financial institution. FCA gladly approved this sale, which included, as part of the agreement, a ''permanent exclusive charter'' to the new
owner. This exclusive charter is important because part of the incentive for Texas to purchase these assets was the knowledge that they would have the benefit of being insulated from competition from within the System so that they could rebuild the capital, the reputation and the quality of available credit in this region. In other words, the Federal Government made a contractual agreement: in exchange for the Texas Bank stepping in and assuming the financial risks associated with this failed institution, FCA granted them an exclusive charter—not to be shared by anyone else in the System—because FCA wanted and needed Farm Credit to be restored in these three states. And this arrangement is still in effect today (a copy is attached).
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In addition, Congress codified this arrangement in statute in 1992 (attached) when questions were raised about its legality. This law, which was agreed to by all parties, remains in effect today and we strongly support it for the reasons I've just stated.
Although First South ACA argues that the playing field is not level and that the treatment under FCA's proposed national charter regulation is unfair, we view this matter as a fundamental property right. For example, if a failed business is purchased and the new owner dedicates time and money and reputation rebuilding that business, the previous owner—or anyone else for that
matter—does not have the right to step in and reclaim that business without compensating the rightful owner (the 5th amendment to the Constitution insists on this principle).
However, we also recognize that we are a cooperative institution and are owned by the farmers and ranchers we serve; and for this reason, we support the need to conduct a stockholder vote as FCA has proposed. We believe that our shareholders have a fundamental right to determine the business model of their cooperative financial institution that was created to serve them. Furthermore, the Federal laws that apply to the Farm Credit System (attached) specifically state that our charter cannot be altered without a stockholder vote whereby a majority of shareholders agree that such an action be taken. This law applies specifically to our geographic area due to the financial failure of the System institution that previously served this region.
In other words, this is a unique situation in the Farm Credit System. But it applies in my part of the country for very legitimate and necessary reasons and that is why FCA has proposed this regulation in its current fashion and that is why we support it.
We recognize that First South ACA, which operates in this same region (but with different lending authority) also would like to share the lending authority that is exclusive to the institutions I represent today. With that in mind, we have offered to discuss a business merger of our institutions, in accordance with what the law prescribes in this situation—to create a new entity that shares lending authorities, customers and geographic territory. However, this option has been repeatedly rejected by First South ACA; because, although they publicly claim to want what's fair for their borrowers, what they really want is the fruit of our labor . . . they want something for nothing . . . they want to renege on the previous agreement because it's not working out for them as well as they originally envisioned. And rather than consider merging and relinquishing some of the control of their institution for the good of their borrowers. ..in other words, rather than making business decisions, First South ACA has decided to make political decisions by asking you to change the law (and by holding this regulation hostage until they get what they want).
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We support the current law that protects our stockholders' right to vote on these important issues and we support the continued recognition that this is a unique situation in the Farm Credit System—one that should be treated differently for the reasons I've addressed in this statement.
Thank you for the opportunity to testify today. I will be glad to respond to any questions.