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47–481 CC







MARCH 11, 1998

Serial No. 105–44

Printed for the use of the Committee on Agriculture
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ROBERT F. (BOB) SMITH, Oregon, Chairman
Vice Chairman
RICHARD W. POMBO, California
NICK SMITH, Michigan
FRANK D. LUCAS, Oklahoma
RON LEWIS, Kentucky
ED BRYANT, Tennessee
RAY LaHOOD, Illinois
ROY BLOUNT, Missouri
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JOHN R. THUNE, South Dakota

Ranking Minority Member
GEORGE E. BROWN, Jr., California
GARY A. CONDIT, California
CALVIN M. DOOLEY, California
EVA M. CLAYTON, North Carolina
DAVID MINGE, Minnesota
EARL POMEROY, North Dakota
TIM HOLDEN, Pennsylvania
SAM FARR, California
VIRGIL H. GOODE, Jr., Virginia
MIKE McINTYRE, North Carolina
BOB ETHERIDGE, North Carolina
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JAY W. JOHNSON, Wisconsin

Professional Staff

PAUL UNGER, Majority Staff Director
DAVID G. DYE, Chief Counsel
STEPHEN HATERIUS, Minority Staff Director
VERNIE HUBERT, Minority Counsel

LARRY COMBEST, Texas, Chairman
Vice Chairman
RICHARD W. POMBO, California
NICK SMITH, Michigan
FRANK D. LUCAS, Oklahoma
RON LEWIS, Kentucky
RAY LaHOOD, Illinois
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CALVIN M. DOOLEY, California
GEORGE E. BROWN, Jr., California
SAM FARR, California
EVA M. CLAYTON, North Carolina
DAVID MINGE, Minnesota
EARL POMEROY, North Dakota
TIM HOLDEN, Pennsylvania
VIRGIL H. GOODE, Jr., Virginia

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    Barrett, Hon. Bill, a Representative in Congress from the State of Nebraska, prepared statement
    Chenoweth, Hon. Helen, a Representative in Congress from the State of Idaho, prepared statement
    Clayton, Hon. Eva M., a Representative in Congress from the State of North Carolina, prepared statement
    Combest, Hon. Larry, a Representative in Congress from the State of Texas, opening statement
Letter of October 24, 1997 to Secretary Glickman
Letter of January 4, 1998 to Secretary Glickman
    Rodriguez, Hon. Ciro D., a Representative in Congress from the State of Texas, prepared statement
    Smith, Hon. Robert F. (Bob), a Representative in Congress from the State Oregon, prepared statement
    Schumacher, August R., Under Secretary, Farm and Foreign Agricultural Services, U.S. Department of Agriculture
Prepared statement
Submitted Material
    Glickman, Hon. Dan, Secretary of Agriculture, letter of March 10, 1998 to Speaker Gingrich
    Kelly, Keith, Administrator, Farm Service Agency, memo of March 5, 1998

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House of Representatives,
Subcommittee on Forestry, Resource
Conservation, and Research,
Committee on Agriculture,
Washington, DC.

    The subcommittee met at 9:30 a.m., in room 1300, Longworth House Office Building; Hon. Larry Combest (chairman of the subcommittee) presiding.
    Representatives present: Barrett, Smith of Michigan, Lucas, Chambliss, Emerson, Moran, Pickering, Cooksey, Smith of Oregon [ex officio], Dooley, Farr, Stabenow, Peterson, Clayton, Minge, Pomeroy, Baldacci, Berry, and Goode and Stenholm [ex officio].
    Staff present: Pete Thomson, legislative director; Dave Ebersole, senior professional staff; Russell Laird, subcommittee staff director; Gregory Zerzan, Callista Bisek, Wanda Worsham, clerk; Anne Simmons, minority staff consultant; Russell Middleton.
    Mr. COMBEST. The hearing will come to order.
    Thank you very much for coming. I would indicate to our guests that both Republicans and Democrats this morning are having caucuses. That should not be any indication of a lack of interest in the subject. I'm sure that we will have Members coming and participating. I know there are a number of Members that have a great deal of interest in this. In order to be aware of your timeliness and your being here, I would want to go ahead and start. I have enough questions that it would occupy a good deal of time if we do or do not have others that come.
    I have a statement that I want to read, but before I do, I want to make certain the record accurately reflects the interest of this subcommittee in dealing with this issue. In your statement, Mr. Schumacher, you talk about the timeliness and the need to move forward on this legislation. I want to make certain that there is a clear understanding.
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    Let me say first, and I feel very comfortable doing this, having sat next to Mr. Glickman from Kansas as he chaired a subcommittee and on regular occasions would mention to administration witnesses the Rules of the Committee on Agriculture require that witnesses submit their written testimony at least 48 hours prior to the hearing. We got this late yesterday afternoon. I would encourage in the future if you could be prompt per the rules of the committee.
    Over a year ago I spoke to the Secretary personally about a number of concerns and a number of areas that probably needed some change. One of these specifically was the issue that we have before us today.
    I spoke to him again in early fall about the need to make some changes. I wrote to the Secretary on the 24th of October expressing concern and my desire to work with him. Without objection, I would ask that these letters be made a part of the record
    [The information appears at the conclusion of the hearing.]
    Mr. COMBEST. On January 4 I wrote to the Secretary again about this specific matter, indicating the fact that I was somewhat disappointed that I had not even received a response to the October letter.
    Then on the 26th of January I received a written response from the Secretary.
    The legislation which the administration proposes arrived late yesterday afternoon.
    So I want to make certain that in the Department's call for expeditious action on this that in the matter of credit issues the Department lacks a little to be desired in terms of their timeliness.
    Mr. COMBEST. Good morning and welcome to all of you here. I would like to thank our witnesses from the Department for their time and effort and preparation to discuss the implementation of this important program with us.
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    The purpose of this morning's hearing is to review the status of the USDA farm loan programs focusing specifically on several main areas of concern.
    First, we will discuss the effect which the reform provisions of the 1996 farm bill have had on the availability of agricultural credit. I would like to get a good idea of what the Department can tell us about the status of those borrowers who had debt relief in the past and who were declared ineligible for future loans by enactment of these provisions in the farm bill.
    Secretary Glickman has announced his intention to propose legislation to change these provisions. That has been submitted, and I think we should discuss the extent to which the legislation is needed.
    I have been interested in addressing this issue for sometime. I first wrote to the Department in October of last year asking for assistance in examining this issue and then wrote a second letter concerning the issue early in January of this year. I finally received a response to my letters in late January, which indicated the Department would be transmitting legislation to Congress to address the situation. As indicated, the testimony we are receiving today is the first time we have actually seen that.
    As we discussed in much detail over a year ago at a field hearing of this subcommittee in Lubbock, TX, I would also like to discuss the status of needed improvements to the guaranteed loan program. I was pleased that Ms. Cooksie followed up on our discussions at last year's hearing by convening a meeting of over 30 bankers and others involved in farm lending programs to discuss in detail the problems that they deal with in trying to make the guaranteed loan program better for some of their borrowers.
    I was glad that a few bankers from west Texas, whom I am very familiar with, were involved in these meetings. I know that these individuals in particular know the problems involved with the program very well and feel certain that they provide very good input to constructing workable solutions.
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    From the minutes of this meeting, I see the discussions involved most of the same issues that I have discussed with them for several years now.
    I am also pleased that the regulations which are moving forward to implement the preferred lender program were developing, taking into account the input of bankers and stakeholders at those meetings. However, I am disappointed that the Department is just now working on regulations for a program that was authorized in 1992. Time is way past due for this program and streamlining changes to other lending programs to be in place.
     Again, I appreciate the time our witnesses have taken. I appreciate your coming. We will be happy to have Member's statements included in the record at this point.
    [The prepared statements of Chairman Smith, Mr. Barrett, Mrs. Chenoweth, Mrs. Clayton, and Mr. Rodriguez follow:]
    "The Official Committee record contains additional material here."

    Mr. Chairman, farm loan provisions in the 1996 farm bill, meant to eliminate the Farm Service Agency's high delinquency rate and make the agency operate more like a commercial lender, were too inflexible and need to be revised. As a lender, the Farm Service Agency's purpose is to help farmers who have endured financial hardships become creditworthy again. By establishing a lifetime prohibition on loans to family farmers who have received debt forgiveness, the 1996 farm bill prohibits the agency from completing its mission.
    The one forgiveness-limit is excessive and more demanding than most commercial lending standards. The policy penalizes a farmer who makes one mistake and later restores his credit record by prohibiting all future USDA loans to that farmer. The results of the current farm loan provisions are onerous and excessive. Some farmers from my South Texas district are losing their livelihood because a previous debt forgiveness has disqualified them from receiving emergency loans used by farmers battered by natural disasters. Other farmers in my district have become delinquent on loans in part because of local Farm Service Agency mismanagement. Now they have nowhere to turn.
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    I agree that the Farm Loan Program should not be a give-away for people who do not repay their debts and continually seek debt forgivenes. But I do not believe farmers who received debt forgiveness because extreme weather, family illness, medical crisis or agency error should be punished. Many of the farmers were granted debt forgiveness with a promise that it would not affect their ability to receive additional loans. The 1996 farm bill revoked that promise to farmers.
    Secretary Glickman's emergency legislation to Congress to repeal this part of the farm bill is a step in the right direction. Creditworthy USDA borrowers should receive a second chance on a case-by-case basis. Special exceptions need to be made for farmers who received debt forgiveness necessitated by weather disaster, family crisis or other special circumstances. We need to restore fairness to those who accepted forgiveness before the 1996 act.
    Mr. Chairman, a farm lending policy with no room for error is impractical and detrimental to the American farmer. I urge the committee to consider legislation to revise the USDA's farm loan policy.
    Mr. COMBEST. At this point would call on the Honorable Gus Schumacher, the Under Secretary for Farm and Foreign Agricultural Services, USDA. Joining him today are Ms. Carolyn Cooksie, the Deputy Administrator for Farm Loan Programs at USDA, and Mr. Keith Kelly, the Administrator of the Farm Service Agency.
    Mr. Schumacher.
    Mr. SCHUMACHER. Mr. Chairman, thank you very much, and good morning. As mentioned, I have Keith Kelly with me, and Carolyn Cooksie. They both do a very good job.
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    I appreciate your invitation to come up here. I'd like to make my opening remarks brief and then submit my full testimony for the record.
    Three things this morning I'd like to discuss, Mr. Chairman. One is the need for changes for the debt forgiveness limitation provisions of the 1996 farm bill. Two, I want to brief you and the committee on the improvements we are making in the guaranteed loan programs, and three, to give you and the committee a status report on the overall program performance on our direct lending and guaranteed lending.
    First, the debt forgiveness provisions of the 1996 farm bill.
    Mr. Chairman, resolving these problems caused by the debt forgiveness limitations instituted by the farm bill are of critical importance to thousands of family farmers and to the Secretary. The farm bill, we feel, went too far in establishing a lifetime prohibition, without exception, on loans to family farmers who have received debt forgiveness.
    The one-forgiveness limit is excessively harsh, much harsher than the standards commercial lenders use, and clearly contrary to the mission Congress has given to us: to provide credit to creditworthy family farmers who cannot obtain loans elsewhere. This policy means that even if a borrower makes just one mistake or has a bout of bad luck and then rehabilitates his or her credit record, USDA, unlike other lenders, cannot make him or her another loan, including an emergency loan.
    We agree there should not be a revolving door for people to have debts continually forgiven and to receive additional loans. However, eliminating the future possibility of a USDA loan is excessive for those individuals who receive debt forgiveness because of the events they could not control, particularly extreme weather conditions or family illness or a medical crisis. Moreover, this provision is grossly unfair to the thousands of borrowers who accepted debt forgiveness with the assurance prescribed by law until 1996 that receiving a write-down or write-off would not affect their ability to receive additional loans.
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    Both the Department's Civil Rights Action Team and the Secretary's Commission on Small Farms cited this prohibition as a major barrier to the continued operation of a significant number of minority and small farms, an essential part of our great agriculture in America.
    The spring planting is approaching; in some cases started. If we fail to act urgently, many of them, banned from USDA's farm loan programs, will be unable to plant before start of business even though they have the ability to repay the loans.
    This morning, Mr. Chairman, the Secretary has officially transmitted this legislation, as you indicated, to Congress to repeal this part of the farm bill. This bill would allow creditworthy USDA borrowers to receive a second chance. They would be disqualified from loans only after a second debt forgiveness. It would also allow for a special exception if one of the first two forgivenesses was necessitated by a weather disaster, a family medical crisis, or part of a settlement of a civil rights case.
    Our proposal would restore some semblance of fairness to those who accepted forgiveness before the 1996 act and recognize that farm lending policy with no provision for any errors or simply bad luck or a medical problem or the disasters we've seen very strongly in the last 2 years is unfair and unrealistic.
    I cannot overemphasize the seriousness of this difficult situation.
    Mr. Chairman, on behalf of the Secretary and thousands of impacted family farmers, I would very much hope that your committee would consider our proposed legislation immediately.
    Let me then touch on improving credit availability briefly. Available sources of credit continue to be a problem for family ranchers and farmers, especially socially disadvantaged farmers. The Secretary and the President have committed to improving credit availability to those producers by requesting additional appropriations for further lending.
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    Our supplemental request seeks to provide $25 million in additional emergency loans to assist family farmers who have sustained financial losses because of ice storms in the upper Northeast, tornadoes in Florida, flooding in California, and a number of increasing natural disasters across the Nation.
    We also estimate that we will exhaust some of our regular loan programs if they are not increased above the amount Congress originally provided. Therefore, this supplemental request would also include proposals for an additional $39 million in farm ownership direct loans, $25 million for farm ownership guaranteed loans, and $10 million for farm operating direct loans. A major portion of these funds is targeted to beginning and socially disadvantaged farmers.
    The overall budget for 1999 will go beyond and will request increases over the 1998 funding, including $39 million for direct farm ownership; 18 percent will be targeted to socially disadvantaged farmers, if approved; $10 million for direct operating loans, with 12 percent targeted to socially disadvantaged farmers, and $25 million for guaranteed farm ownership loans. We are also proposing no reductions in funding for guaranteed farm operating loans.
    Let me touch on the improvements we are working on in the guaranteed loan program. This is a very important issue.
    Mr. Chairman, with the advice and cooperation of the borrowers—you mention this in your statement—private sector lenders, State finance authorities, academia, farm groups, and the Farm Service Agency, we have embarked on a very ambitious initiative to make major changes in the guaranteed loan program, both operating and ownership.
    First, we are producing a limited documentation, or ''low doc'', package for loans less than $50,000 under the guarantee program to encourage lenders to make more small loans to beginning and limited resource producers. This low doc package will also reduce processing time and allow the Farm Service Agency to respond more quickly to these requests.
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    Second, and an area that you mentioned you introduced in 1992 when it was authorized, developing standards for the preferred lending program. Again, with the cooperation of the borrowers and the private sector lenders, these standards will allow us to operate an efficient and effective and more friendly program that will make the preferred lending program guarantee available to farmers. We have been working very hard on that recently, and I'll take questions on that.
    Third, streamlining our loan regulations and paperwork. This is a massive project, but when finished, the farm loan program procedures will in effect be brand new. Right now FSA has 60 different sets of instructions to operate these programs. We will reduce, condense, and combine these by a factor of ten, reduce the size of the program instructions by one-third, and reduce the number of forms by one-quarter. This is a very major initiative. Carolyn and her staff are working very hard on it.
    Let's then move quickly to the status of program performance. Just a few highlights.
    This past year we made 15,000 new direct loans, nearly $800 million, and issued about 12,000 new guaranteed loans, $1.5 billion. Assistance to beginning farmers reached a new high: 4,700 direct loans, $234 million, and an additional 1,800 guaranteed loans for about $215 million. Loans and guarantees to minority farmers totaled $163 million as part of the continuing commitment to address and resolve the civil rights issues confronting the agency and the Department.
    We have also developed and implemented a new loan program to support the efforts of cotton farmers to eradicate the boll weevil in 1997. The agency loaned $40 million to fund operations in Texas, Mississippi, and a consortium of Southeastern States. Payments on all these loans are on schedule, and the delinquency rate is zero.
    Turning to the guaranteed portfolio, outstanding FSA loan guarantees total $6.5 billion as of September 30, 1997; roughly 40,000 farmers have received loans under the guaranteed program. It's a fiscally sound program with one of the lowest loss rates of any Federal loan guarantee program.
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    To date, Carolyn and her group have provided farmers with 6,000 direct loans this fiscal year, about $300 million; 3,700 guaranteed loans, $500 million; and $10 million in loans to the boll weevil eradication; and we expect to make additional loans.
    We now service, Mr. Chairman, 110,000 direct loan borrowers and about 40,000 guaranteed loan borrowers. Our total portfolio is $11.2 billion in direct loans and $6.6 billion in guaranteed loans. That has come down quite a bit from the mid–1980's in terms of the percentage of overall lending. We can go into that during the questioning period.
    Let me touch briefly, in concluding, on our delinquent loans. I have personally worked very hard with Carolyn and Keith to look at all of the delinquency issues, and particularly at the large loan operations. While we are the lender of last resort, we also must be fiscally responsible and prudent lenders.
    During last year our delinquent borrowers fell 20 percent, and the amount of outstanding delinquent debt also fell by 16 percent. Our net losses and write-offs declined by $543 million, a 42 percent reduction.
    There are still some problems, especially on the larger loans, but I believe it's important to put the situation in perspective to recognize that 92,000 or over 80 percent of our direct borrowers were current or ahead of schedule on their payments, and if we take out the old large emergency loans, that will be even higher.
    Since we are the lender of last resort for farmers and ranchers, a delinquency rate higher than that of a commercial lender is to be expected, but we believe the delinquency rate is still too high, and we are working very hard to reduce it.
    I personally reviewed the large $1 million-plus portfolio on those old economic emergency and the emergency loans that were made in the early 1980's and mid–1980's, and we are working to collect and resolve these large loans.
    This is a small group. It has been reduced by half in the last 2 or 3 years. We have 425 cases that we are working on, and that accounts for one-third of the total delinquency. We have given our State directors ambitious goals to further reduce those, and I'll take questions where we are on that.
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    In conclusion, I want to emphasize the high priority we place on fixing the provisions of the farm bill, providing more funding for our credit programs for this fiscal year, and fully funding our 1999 budget request.
    Carolyn and her team have processed a high volume of loans, improved servicing and collections, and helped many farmers this past year. We should not overlook a staff that is stretched very hard and their tremendous accomplishments. They are building a solid track record of progress, and I'm very proud of what they are doing.
    We look forward to working with you to achieve the objectives of these loan programs, to make the amendments that we need to make, and provide the assistance that family farmers so richly deserve.
    We would be very pleased to take your questions this morning, Mr. Chairman and committee members.
    [The prepared statement of Mr. Schumacher appears at the conclusion of the hearing.]
    Mr. COMBEST. Ms. Cooksie or Mr. Kelly, do either of you have opening statements?
    Ms. COOKSIE. No.
    Mr. KELLY. I do not.
    Mr. COMBEST. Thank you very much.
    Obviously we want to discuss some of the details of what the proposed legislation is, but before we do that, I want to sort of go back into part of the overall program. If people are not participating in a program or finding difficulty, or banks are not participating in the guaranteed program, it doesn't matter what the program is. We have a need to correct some of those problems.
    This is an issue that I have been dealing with for 14 years, trying to do something to make the old Farmers Home loan program work much more efficiently without being so cumbersome. I want to commend you for, as you have outlined, the major reductions in paperwork and other forms that you are looking at for the end of 1999. I would have liked to have seen this happen a lot earlier, but this also goes back under a number of other administrations. So it's not singling you out.
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    I will assure you we will follow that timetable closely. Even though that is going to be beyond this credit season and it will be beyond the credit season of 1999, I am interested in that, and if it's possible for you to complete that at an earlier date, I would suggest you do that.
    Let me read to you from April 29, 1992, the opening statement of the Honorable Dan Glickman of Kansas in this committee. This is a portion of that.
    Mr. Huckaby and I introduced our own credit bill, the Farmers Home Administration Improvement Act of 1992, to correct some problems farmers and bankers have with a few farmers home programs. One major problem with the loan program is the delay in the loan review process. My bill, as well as Mr. English's strengthens, the current 60-day deadline for FmHA loan review process. Another provision in my bill, which I hope the subcommittee will consider, reduces the voluminous paperwork involved filling out FmHA loan and guarantee applications. In many instances this laborious process, especially for the guarantee program, discourages banker and farm participation. I understand that the Department in following the President's instruction will be reworking regulations and cutting red tape from these loan programs. If this is the case, I would like to hear from the Department the steps it is taking and how soon the new regulations will be up and running.
    This thing goes back for a long time and has involved a lot of people who are currently involved in other capacities.
    There are two areas of concern that I would like to deal with first to see if we can get some clarification.
    We deal with a lot of bankers who are involved in the guarantee program. Ms. Cooksie graciously came for a field hearing that Mr. Stenholm and I participated in in January a year ago. She heard that day, as well as I'm sure you hear every day, about the concern that some of the lenders have in the program. We are not talking about the paperwork volume here. That all goes without saying, and we still have concerns.
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    But in going around and talking to bankers, I guess I would just have to sort of sum up their comments as they don't trust the FSA in dealing with loan loss situations and are getting to a point that they are not going to make any new loan losses. Their concern is not in the areas that would have an impact on the farmer's ability to pay that loan or not. It has nothing to do with the fact that a loan failed. But I would have to say nitpicky areas in which they have been refused their collection from FSA on parts of those loans.
    I'm going to give you one example.
    Under the guaranteed program, a farmer cannot advance for equipment payments. That's very clear. A specific case. A farmer comes in in May, has already done the custom work for an individual. The individual is going to pay this farmer in June. He asks for an advance in order to make an equipment payment in May so he is not delinquent. The bank advances him that with the understanding that as soon as he receives that payment from that farmer that he has done custom work for that it will be applied back to the note, and all of that happens. Yet eventually the farmer defaults and the Farm Service Agency will not pay that portion, even though it was repaid.
    That had nothing to do with the fact that this farmer went under, and that seems a little nitpicky to me. If you are going to have bankers who don't trust that the agency is going to uphold their end of the bargain, then I think you are going to continue to find that it is difficult to do that.
    The other is quite honestly with the process by which farmers go in and make application. If you look at the record that FSA gives in terms of the time delay between when a person's application is filed until it is approved, it looks fairly good on paper. However, that does not consider the fact that it may lay in that office for 4 or 5 weeks, find some small error in it, send it back to the farmer; it has to be redone. It comes back in, and the time doesn't start until the FSA says it is a completed application.
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    What I propose you look at is coming up with a checklist so that anybody in that office under the new consolidation program should be able to look at that and say, well, yes, it is complete, or no, it is not. And if it is not complete, the time is stopped during that period of time. But when that person takes it in, rather than waiting 4 or 5 weeks to hear back from the FSA that the application is not complete, they ought to be able to know on the spot whether it is or not, and if it's not, then it become incumbent upon the farmer to get it together.
    They don't know while it's sitting there for weeks at a time, waiting to even be reviewed, and then coming up with the fact that it's not a complete application. I am concerned that that is not fair to the farmer. I would certainly encourage you to look at some of those areas.
    My time is up. We will have a number of rounds of questioning. You may or may not have any comments on that. None required if you don't.
    Mr. SCHUMACHER. On the second point, I think it's a very good point.
    Carolyn, we have some guidance on that out in the countryside.
    Ms. COOKSIE. I think you are right, Congressman. We've got to tighten up on it some. The statute actually says that we are supposed to notify the bank within 10 days whether there is a completed application or not. So if we have some places where that is not happening, obviously we have a problem.
    Mr. COMBEST. You do have some places that is not happening.
    Ms. COOKSIE. In Texas, I am particularly concerned there are some places that that is not happening, yes.
    Mr. SCHUMACHER. It's a good point. We are going to make sure that that does happen. Carolyn and I will work together on that issue. I'll be down in Texas next Monday. We'll be looking into this.
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    Mr. COMBEST. Thank you very much.
    Mr. Minge.
    Mr. MINGE. Thank you, Mr. Chairman. Thank you for calling the hearing.
    Secretary Schumacher, we are pleased that you are here; Ms. Cooksie and Mr. Kelly.
    There are certainly many things that I think all of us have viewed with some concern in connection with the former FmHA or now the FSA loan programs. But I think it's perhaps best at the outset to observe that these programs have been vital to allowing tens of thousands of farmers in this country to both establish themselves and to survive some of the turbulent times that have beset agriculture.
    Really what we are trying to do here this morning is to identify ways that working with the Department the programs that we have on the books can be strengthened. In that spirit, I would like to ask about several things, some statutory and others administrative, that I would hope would improve the programs that we have.
    One has to do with a topic the chairman just asked about, or it was closely related to it, and that is bridge loans. It's my understanding that when it comes to eligibility for direct farm ownership loans that the 1996 Act is being interpreted so that if a farmer who is eligible for a loan finds that he is about to lose the property that he has an option or a purchase agreement on because there is a delay in processing at FSA, or they are waiting for approval as to their commitment authority. And if that farmer then goes to a relative or a bank and receives a bridge loan so that that farmer does not lose the opportunity to purchase that asset, that the Office of General Counsel is now interpreting this as refinancing, and thus it is impossible for that farmer to take advantage of the FSA program.
    If that indeed is the case, I think that's an unfortunate action by the Office of General Counsel interpreting the law, and I'd like to know if the Department feels that this can be corrected internally or if you would recommend that we change the law so that this untoward result does not occur.
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    Mr. SCHUMACHER. Let me make sure I fully understand it. A farmer is going to buy a farm and it takes a while, as some people noted here, to get the loan through the FSA. So he obtains some bridge financing from someone. Therefore, because he has been able to obtain bridge financing, that would mean because he has obtained some financing from somebody that he would not be eligible? Or is it a different issue?
    Mr. MINGE. As I understand it, the problem is that the law precludes FSA from refinancing, and that any type of bridge financing is being construed as a refinancing, and thus the application which was approved and which would have resulted in a loan has now become worthless.
    Mr. SCHUMACHER. Gets tossed out.
    Mr. MINGE. Let's say just buying a 40-acre piece of land. In order to not lose that opportunity, he has used this bridge loan. From the nodding of the heads, I think Ms. Cooksie apparently has encountered this. If someone could respond to it, I would appreciate it.
    Ms. COOKSIE. That is correct. That is OGC's interpretation of what the law says. I believe that it is based on the fact that we are the lender of last resort, and the test for credit, in their interpretation, if you can get credit somewhere else, then you should not be able to get a loan with us.
    Realistically, we both know that was really short-term financing that somebody expected to get paid back. But in the legal opinion that we have, that is refinancing.
    Mr. MINGE. So the only way that we can clean up this situation would be legislation, or can you clean it up internally?
    Ms. COOKSIE. We've got a legal interpretation that is pretty solid from OGC. I believe that it would have to take legislation to clean it up.
    Mr. SCHUMACHER. It's a good point, Congressman. I'm going to look into this a bit more with our good friends in the legal counsel's office. We may come back to you on the interpretation of that and then see if it does formally require legislation. Thank you for that good question, though.
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    Mr. MINGE. Another problem that we have apparently encountered in trying to implement the loan program in Minnesota is that the ability to transfer your lending authority from one program to another, let's say from a guaranteed operating loan program to a direct farm ownership program, is relatively late in the fiscal year. I can understand that there are reasons why it has to be late in the fiscal year.
    On the other hand, there has been a fairly consistent level of transfer over a multiyear period, and what we are finding is that the ability to take advantage of the program is being lost by many farmers because they are unable to receive loans until so late in the fiscal year that the opportunity to make the purchase has slipped by, and that some of the local FSA offices feel that they would be able to actually make the loan, complete the deal if they simply were able to get authority, probably from Washington, earlier.
    Again it's a question of whether it would take legislation to correct this or if you could correct it internally.
    I'm not suggesting that you should not be careful or prudent in making these transfers. It's simply that through an abundance of prudence it appears that there is a lot of frustration at the local level, I think both for FSA offices and certainly for borrowers in trying to utilize or be a participant in your programs.
    Mr. Chairman, I notice I have run slightly over here. If you would prefer, I would be willing to accept an answer in the next round or a written answer later.
    Unless you could answer this quickly.
    Mr. SCHUMACHER. My understanding—and Carolyn and Keith, correct me—is the statute does not allow us to advance the timing of when we can make those reallocations.
    Is that correct, Carolyn?
    Ms. COOKSIE. Yes. Statutorily we can only do it August 1 and September 1.
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    Mr. MINGE. So we'd have to change the law if you were to have more flexibility in that respect.
    Ms. COOKSIE. Yes.
    Mr. MINGE. Would you be able to go back and look at the situation and make a recommendation as to what specific type of change we should consider?
    Ms. COOKSIE. We'd be happy to.
    Mr. MINGE. Thank you.
    Mr. COMBEST. The Chair would indicate the pleasure of having the chairman of the full committee, Mr. Smith, and the ranking member, Mr. Stenholm, join us. The Chair would recognize Mr. Smith for any comments he would wish to make.
    The CHAIRMAN. I thank the chairman very much. I have a statement for the record, Mr. Chairman.
    Good morning. Welcome. Thank you for being here.
    What is your loss ratio to loan value in each of these categories, please?
    Mr. SCHUMACHER. We have it here. Carolyn, would you like to inform the chairman on the details of the improvements we are making in getting these losses and delinquency rates down?
    The CHAIRMAN. Mr. Schumacher, while she is looking that up, it has come to our attention that a number of these discrimination cases to the Department have been dropped out because of the legal limitation of bringing these cases. I think about half of them. We are tying to determine whether or not the reason for them dropping out was the fact the Department just hadn't either taken the time or had the manpower or woman power or what other reason they just were never considered. If that is the case, would you support reenactment of the some of the civil rights cases that have been eliminated because of the Department's lack of attention?
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    Mr. SCHUMACHER. This is very difficult. One of the key issues in dealing with these questions is the statute of limitations.
    The CHAIRMAN. That's my question exactly. I understand that you can't do it by rule because it is a statute of limitations question. I'm asking you if the Department would support a program to extend the statute of limitations at this point since, if it is true that it is the Department's fault that these things have passed over the time limit, then it doesn't seem to be fair to let them drop out because of inaction of the bureaucracy.
    Mr. SCHUMACHER. The Secretary is working right now on a bill precisely on this issue, Mr. Chairman.
    The CHAIRMAN. When will we be able to take a look at that?
    Mr. SCHUMACHER. I'll have to get back to you. I'm not exactly sure when that bill is going to move forward and be submitted here to the Congress.
    The CHAIRMAN. You tell him for me that we are very interested in that, and that if he isn't working on one, we're going to work on one.
    Mr. SCHUMACHER. Precisely.
    The CHAIRMAN. Thank you.
    Mr. SCHUMACHER. What I think is very interesting is that on the preferred guarantee, roughly about 3 percent is our delinquency rates on a number of the preferred operations. On the overall ones?
    Ms. COOKSIE. I think that's the delinquency. The loss rate, I believe, is what Mr. Smith was asking for. The 1997 loss rates, which is what we just got finished with, the director program, 6.5 percent; the guaranteed program is 1.5 percent. That's our loss rate.
    The CHAIRMAN. What is your loss ratio for beginning farmers?
    Ms. COOKSIE. I'm not sure I have that with me, but I'll be glad to get it to you. We don't have them broken down into categories in this.
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    The CHAIRMAN. You should do that simply because that's probably your greatest exposure.
    Also, what about your minority and female farmer losses?
    Ms. COOKSIE. We've got that broken down. I don't have it with me, but I can get it for you.
    The CHAIRMAN. Break them down for me in each of these categories, would you, please?
    Ms. COOKSIE. OK.
    The CHAIRMAN. Thank you, Mr. Chairman.
    Mr. COMBEST. Thank you, Mr. Chairman.
     Mr. Stenholm.
    Mr. STENHOLM. Thank you, Mr. Chairman. I am just curious. Why is it taking so long to get the preferred lender program in operation? This committee held hearings a year ago. We saw the stack of regulations and rules and paperwork in SBA. Why is it taking so long that we can't get it done even by 1999?
    Mr. SCHUMACHER. This is something I've looked into myself, Mr. Chairman, and I'm certainly committed to getting this program up even faster. We would like to get the low doc and the preferred guarantee program up for the next lending season if at all possible. It's something I've taken a lot of personal interest in in the last 6 months since I've been Under Secretary, and I look forward to working with you and the chairman to get this thing up and moving.
    Mr. STENHOLM. What is causing us not to be able to do it? What are some of the stumbling blocks that cause you to have missed by 1 full year what should have been done 6, 9, 12 months ago? What is it that is causing it? Is it legislation? Is it Congress? What is causing you to be unable to develop a preferred lender program? Anything?
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    Ms. COOKSIE. Frankly, the competing priority for resources on my staff.
    Mr. SCHUMACHER. This requires regulation, correct, Carolyn?
    Ms. COOKSIE. Exactly.
    Mr. SCHUMACHER. We are going to put out a regulation as soon as we get the documentation on both the low doc and the preferred guarantee. It is something that I have taken quite a lot of interest in, and we're going to work very closely with the staff to get that up and running to see if we can make the next lending season, Mr. Stenholm, for this very important program.
    Mr. STENHOLM. What are some of the competing priorities for your staff that are taking a higher priority?
    Ms. COOKSIE. We've had to do quite a bit of emergency loan training out in the States where they have had disasters. We are trying to do the streamlining at the same time of the direct program, which, as you know, is very cumbersome. We were doing a lot more servicing over the last year of some of loans than we did in the previous year because of our loss rates and our delinquency rates. So trying to balance all of those priorities at one time and yet get it all done is difficult.
    Mr. SCHUMACHER. Also, we have worked very, very hard, Mr. Stenholm, on the issue of getting minority borrowers addressed in a very, very aggressive way in the last year. We put a lot of effort into that, and that has taken a lot of staff time. Correct staff time, in my opinion.
    Mr. STENHOLM. No further questions. It's just mind-boggling to me that we went through this same thing in another Government agency, in SBA, and for all practical purposes they have achieved it. The same lenders will participate with us.
    It looks to me like it would be a little simpler than what we are making it, except I do understand the competing issue, Ms. Cooksie, that you mentioned. I understand that very well, but it's totally inexcusable that you are having to face some of those problems within your own Department. The quicker we face up to that, the quicker we will be able to get the kind of lending program to our producers that they deserve.
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    I hope you can do it quicker than 1999. It ought to be able to be done in a matter of weeks.
    Ms. COOKSIE. The streamlining in the guaranteed program will be quicker than 1999. I expect that we will have the regulations out there in final before the next lending season, which starts roughly at the end of 1998. What will take longer is the entire streamlining project for our direct programs and the entire program. That is what we are projecting for 1999, Mr. Stenholm.
    Mr. SCHUMACHER. Mr. Chairman and Mr. Stenholm, we may divide this and do hopefully the low doc and the preferred guarantee and get that out for the next lending season, if that's possible. Then the more complicated issue of getting all these regulations simplified and made clearer may take a little bit longer. As I mentioned in my testimony, we have a lot of work to do. We may separate this out into two parts and move these first two parts forward a little more quickly.
    Mr. COMBEST. Mr. Moran.
    Mr. MORAN. Mr. Chairman, thank you for having this subcommittee hearing. Mr. Under Secretary, thank you for being here. I'd like to wander just a bit, although I think it comes back and is fully related, particularly the issue of refinancing farmers.
    The shared appreciation agreements. I think, Mr. Schumacher, we indicated we might ask you some questions about this. It's my understanding that there are a significant number of producers out there who had their debts reduced and entered in shared appreciation agreements. In many cases those are set to expire in 1999, a year away, and land values to some degree are returning to higher values in Kansas and elsewhere in the Midwest.
    I wonder what preparation we are making for the issue of asking farmers now to repay debt under the shared agreement, whether we are notifying farmers that that's around the corner. A year is not very far away for most producers. And also the impact of the inability for USDA to make additional loans, refinancing to help those farmers make those payments back to USDA.
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    Mr. SCHUMACHER. I'm glad that question came up. We now have 7,500 active shared appreciation agreements in force. It started back in 1987, 1988, 1989. The average is about $140,000 for the write-down of the debt in those 7,500 loans. Some of them are coming due in the tenth anniversary, which will be next year.
    I'm going to ask Carolyn to expand a bit on this. We are going to try to do two things if those come due. One is to annually inform the farmers who have shared appreciation agreements of their agreements as a reminder, and second, to see if those can be restructured and sent out. Currently they are only informed 6 months before the shared appreciation agreement is due. So this is two issues we are going to look at.
    You're absolutely right. I noticed the figures this morning. Iowa farmland has gone up 9 percent. So farmland is gaining in value, and as the shared appreciation agreements kick in, I think it's important that as an agency we inform farmers on an annual basis, and when there are some problems we help them to work these out.
    Carolyn, would you like to amplify?
    Ms. COOKSIE. No, except I think we have the absolute need to tell the farmers at least a year in advance that the shared appreciation agreements are going to be coming due and then try to work with them on restructuring their loans if possible, and making them a nonprogram loan with an interest rate just a little bit higher, but not much higher, in order to keep them in business, because the last thing that we want to do is run farmers out of business because their shared appreciations are due. We are going to really work with the farmers to try to keep them in business.
    Mr. MORAN. I think, Mr. Under Secretary, or Ms. Cooksie, the part I don't understand is ''try to work with farmers.'' What options do you have for the farmer who comes in and now owes, as you say—I guess if the debt forgiveness was $140,000, they would owe some portion of that back to the Federal Government. What options does USDA have to assist that producer in making those repayments?
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    Ms. COOKSIE. The only option we have, as I said, is to make him a nonprogram loan. We can make him a loan for that amount and he can pay it out over a period of years if we can restructure his entire debt in order to make a cash flow.
    Mr. MORAN. Does the 1996 farm bill prohibition against refinancing not prohibit that?
    Ms. COOKSIE. No, it doesn't. This is a liability he already has out there. So it's not really considered a loan even though we call it a nonprogram loan.
    Mr. MORAN. OK.
    It is my understanding in visiting with USDA employees in the counties that they don't believe that their farmers know and have not given any thought; this is not a topic that there is great knowledge about. So I encourage you to do what you said you were going to do, which is get information out there. It will be much easier to deal with producers if they begin the process of trying to solve this problem now than if they are notified shortly before the repayment is due. So I encourage you to do what you said you were going to do.
    The other line of questions I would like to ask is about loans available for infrastructure. One of the significant problems we've had in the Midwest is lack of rail service and grain on the ground. On-the-farm storage is becoming a more and more significant issue. What kind of credit is available to producers for infrastructure, in particular for grain storage? Loans for railroads. As the chairman says, what are the options?
    Mr. SCHUMACHER. First, on the overall issue, I had a very good meeting with the head of Farmland yesterday, and I've been working very closely and watching Mike Dunn, how he has looked at the whole issue of the railroad situation. I'm not sure it's getting much better, Mr. Moran, to be very candid.
    Mr. MORAN. I think it's very realistic.
    Mr. SCHUMACHER. The Secretary has spoken many times on this issue. When I talk to farmers out there, whether it's Kansas or Montana, the railroads simply are not providing the services that I personally feel they need to provide. What I am concerned about is if we are making tremendous progress in new technologies on the farm, and if we lose those technologies from the lack of productivity and improvement in the rail infrastructure system, then I think our family farmers are done a disservice.
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    On the loans to on-farm grain storage, I think those are permitted. Carolyn, is that correct?
    Ms. COOKSIE. That is permitted under the operating loan program.
    Mr. SCHUMACHER. But why should the family farms have to borrow to basically bail out the railroads? It just doesn't make sense to me.
    Mr. MORAN. You're asking the same questions my constituents ask. Thank you, Mr. Under Secretary.
    Thank you, Mr. Chairman.
    Mr. COMBEST. Thank you.
    Mr. Peterson.
    Mr. PETERSON. Thank you, Mr. Chairman. I appreciate your calling this timely hearing.
    Representative Pomeroy and I have an emergency situation that is going on up in our district. You indicated that you were asking for additional funds for the Northeast and for California and Florida. Well, I want to tell you that we have now lost a crop 5 years in a row up in our area in five or six counties.
    My people are telling me that we have a demand in the direct guaranteed operating loan with interest assistance in my five counties of $12 million, and all you are asking for here in total for the whole country is $25 million. I think you are way short of what is going to be necessary. Just to address our situation would take half that money. That's just on the Minnesota side. I assume that Earl's area would take the rest of it.
    Those of you that haven't come up against this, there are a lot of positive aspects of the farm bill that we passed, but one of the problems is we gave up the disaster program and we didn't fix crop insurance. We have put these people in real jeopardy through no fault of their own. We put them into the world market; we put them into this situation that is way beyond their control, and we haven't given them a way to underpin this. And loans alone are not going to solve this. It may help us get into the field one more year.
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    We have an emergency situation where we are probably going to lose 25 percent of our producers in three or four of these counties this year. These are people that have not ever had one write-down of any kind.
    It seems to me that if you are asking for legislation to open this up to people that have had two or three write-downs, you're going to be taking additional resources out of these programs to fund these people and make it even shorter. It's pretty hard for me to go home and explain to people why we should take care of people that have had two or three write-downs when we can't help people that are in trouble for the first time.
    You need to understand that it's the Government that caused a lot of this problem, because we now have a crop insurance program that will only cover half their exposure, and their bankers are saying, we can't go with you another year because you're putting 120 bucks in the ground and your insurance will only cover $60.
    What I told the Senate Agriculture Committee yesterday is our people are saying to us, what does the Federal Government want us to do? Do you want us to quit farming? That is a question I'm getting from my producers every time I got back and have a meeting.
    We've been growing wheat up there for 101 years. It used to be an area where we never had a crop failure. Now we've had a crop failure for 9 out of the last 10 years, and we don't have any way to address it. I'm getting tired of going home and having meetings—I had 900 farmers at a meeting this weekend, and I have to say we don't have any answers; we don't have any solutions.
    We can give $18 billion to the International Monetary Fund to bail out banks that make risky loans in Korea, but there is nothing that we can do to help farmers here that have gotten into this situation through no fault of their own.
    We have to somehow or another address this. I'm going to put a bill together and try to get some kind of amendment adopted in whatever disaster bill we have to try to help address this situation so we don't lose this 25 percent of our producers in those areas, because it is going to devastate the whole economy.
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    I just want to put you on record that we have needs to take the entire amount of money that you are proposing just for our 12 counties in northwestern Minnesota and northeastern North Dakota. We have a serious situation, and I can assure you that Earl and I are going to be involved in this, trying to do everything we can to come up with some kind of a solution. I just want to put you on record.
    I don't know if you have heard from the people, the FSA in Minnesota or in North Dakota. I have asked them to make a request of you to try to internally shift money somehow or another within your organization up into that area to try to address this. I don't know if you have heard about that or if there is a possibility that you can do that.
    Mr. SCHUMACHER. I'm going to ask Keith. On the general issue, I have been visiting Minnesota and North Dakota and Montana a fair bit in the last 3 or 4 months. The situation is very difficult. Ken Ackerman has been visiting with you, and I think he testified yesterday after you testified before the Senate Agriculture Committee on the insurance hearing they had.
    Ken and I are going to try to work very hard on the APH issue that have to get somehow looked at because of the more frequent disasters that are occurring and the more frequent difficulties that you are having in the northern Plains that are affecting your wheat growers.
    Keith, on the specific question.
    Mr. KELLY. Congressman, in Minnesota the State Executive Director just yesterday faxed several documentations in to request what we can do. I have put that to the appropriate agency to see what flexibility we have.
    Mr. PETERSON. One last thing, before my time runs out, on the emergency loan situation. The reason crop insurance doesn't work is the way it's structured. Every year that you don't have a yield it reduces the amount that you can be covered. Now we have got disaster declarations, but on meeting the threshold you have the same problem.
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    If you have been a disaster area 9 of the last 10 years and every year you've got yields that are like 15 bushels an acre, the threshold that you have to hit you can't meet unless you get down to 5 bushels an acre. And then it doesn't really do you any good. So the emergency loan program really doesn't work because it's structured backwards.
    Somehow or another we have got to come up with some kind of a solution to try to get through this. Our people are asking us, should we become a buffalo commons? Is that what you want, to let us go back to native prairies so that the urban people can come up and drive through and look at the buffalos and the song birds?
    That is what people are beginning to wonder. The thing that got the most applause in the meeting was when one farmer stood up and asked how those farmers up there could become part of the Endangered Species Act. They think that might be the solution to their problems; they might get some Government help that way.
    They are pretty frustrated, and we've got to come up with some kind of a solution.
    Mr. COMBEST. Mr. Chambliss.
    Mr. CHAMBLISS. Thank you, Mr. Chairman.
    Mr. Under Secretary, we appreciate you and your folks being here today. This is a very timely hearing from my standpoint.
    Let me say, Collin, I think our farmers are becoming an endangered species because there are certainly less and less of them, and a lot of it's due to our financing programs that we administer from this level up here.
    First of all, I do want to commend you for the very prompt reaction that your office and Secretary Glickman also gave to our farmers with respect to the recent disaster that we have had in the Southeast and particularly in south Georgia.
    Unfortunately, the wet weather that began in September has only gotten worse. We had another 6 to 9 inches of rain just this past weekend and have some severe flooding going on right now. I've got farmers who normally would have had their cotton out of the field by the end of November who have yet to get that cotton out of the field. So it has been a real disastrous year for the farmers in my district and in our part of the state.
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    While I want to commend you on that, I want to talk a little bit about this disaster program that we have got. Mr. Peterson said that the emergency loan program is not working in his area.
    The program itself is a disaster for our farmers. A lot of it may be due to some reasons that Congress is responsible for, but I think a lot of it is simply due to the fact that we are not doing all we can do from an administrative level for the farmers.
    When our farmers go in now to apply for disaster loans, they go to the FSA office, and what they receive is the exact same package that a farmer would receive going in to borrow money as if we were going to the old FmHA. It's the exact paperwork. It's a stack of paperwork. He has to follow the same procedure of, number one, meeting that threshold of never having a write-down before. He has to get turned down three times. He has to have 100 percent collateral for the loan.
    These are disaster loans. They're there because they are in a disaster situation. For us to require 100 percent collateral, the three turndowns, I think is really totally ridiculous.
    They were told originally by your office it was going to be a 90- to 120-day turnaround. From the middle of February for 90 to 120, those loans would be useless, because we're talking about repaying operating costs for 1997 that they have not been able to recuperate.
    I do appreciate your prompt attention to that issue and the assurance that we would have a 60-day turnaround, but the problem is nobody can apply for them because they don't meet the criteria.
    So this program of emergency and disaster loans that have been made available for the 119 counties in Georgia is a total disaster in and of itself. I don't know just how many loans have been processed, but I will tell you there have been very, very few.
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    I don't know what we can do about that, but I want you to address that. I would like for you to tell us what I can go home with this weekend and face those same farmers that Mr. Peterson is talking about facing and try to give them some assurances that when we said we were going to eliminate the commodity support programs that we would be there as a safety net in times of need what that safety net is. Why aren't these programs working like we thought they were going to work?
    Mr. SCHUMACHER. First, we are going to get the approvals a little faster. Carolyn is working on that. One of the biggest problems, Mr. Chambliss, is it's required by statute that we have to deal with the emergency loans basically on the same criteria as we deal with direct operating loans.
    Carolyn, do you want to amplify a little bit?
    Mr. CHAMBLISS. Tell me what criteria that is from a statutory standpoint. That's one of my questions. If we've got some correcting that we can do, then I look forward to working with my friend Mr. Peterson to make those changes as soon as we can make them. If you can address those specifics, please.
    Mr. SCHUMACHER. We'd be pleased to.
    Ms. COOKSIE. It is a problem, because those are the times when we need to expedite the most. The term ''emergency'' implies that we are going to be able to get it out a lot quicker, and in some cases we do.
    Unfortunately, the statute requires the same things as if you were filing any other application with FSA. You mentioned the 100 percent collateral; denials of credit. We had some portions of the country last year where the bank was even flooded and they couldn't got to the other places of credit. So we were able to waive that. But it is a bulky process.
    As a part of the entire streamlining project we are going to try to take away the things that are not statutorily there to make the program more usable. But if this is really going to be an emergency program, some of the statute-driven things that are in there we're going to have to work on a little bit.
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    Mr. CHAMBLISS. Tell me what.
    Ms. COOKSIE. Like the 100 percent collateral; like the test for credit.
    Mr. CHAMBLISS. That's required by statute?
    Ms. COOKSIE. Yes.
    Mr. CHAMBLISS. For a disaster loan?
    Ms. COOKSIE. Yes. And the test for credit is still there in the statute for emergency loans. Or go to other banks and get turned down before you can come back to us.
    Mr. CHAMBLISS. OK. If that's what it takes.
    The $2 million gross income cap, is that statutory also?
    Ms. COOKSIE. That's a family size farm. That doesn't relate to the loan program, I think.
    Mr. CHAMBLISS. That does not apply to the emergency loans? Some of my folks have been told it does.
    Ms. COOKSIE. Not that I'm aware of. We'll check it, but not that I'm aware of.
    Mr. CHAMBLISS. Just so you all will know, get ready for another rash of them, because it looks like all our peaches got killed last night.
    Mr. SCHUMACHER. We were hearing about that.
    One important point, Mr. Chambliss and members of the committee. We do have concerns about the safety net. One other big issue we have is a safety net for livestock. I want to come back with the committee. Keith is working on this a lot.
    In the next few months we want to come back and discuss this in a little more depth with you in terms of how the safety net is working. The Secretary is going out and talking to a lot of farmers with the deputy and myself and Keith and others over the next few weeks, in late March and early April.
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    I think we also have to look at how livestock, which is 50 percent of farm receipts, is affected by some of these very difficult disasters. We'll come back and discuss that with you a little later.
    Mr. COMBEST. Mr. Baldacci.
    Mr. BALDACCI. Thank you very much, Mr. Chairman. Mr. Chairman, I just wanted to thank Mr. Schumacher and Carolyn and Keith for the work that they are doing to help our Maine farmers. I understand the complications with the disaster.
    I want to reinforce what other Members have said. Frankly, our farmers are out there left to dry because the Stafford Act, which covers the emergencies, does not apply to agriculture, and our farmers who are going for assistance are being told that the small business definition doesn't include farms. They're being told that outside of loans there is nothing there for them, and frankly, they are not going to get any loans if they're a bad credit risk.
    So you can throw the blight, the disasters, the frozen peaches, and anything else you want to at it. If they are confronted by a natural disaster, they're not going to get any help. I think it's a shame, and I don't blame you folks. I blame ourselves and what had happened in the farm bill and what was there. It was not pleasant and it isn't pleasant.
    As you can see from the farm business balance sheet, what is going on in the State of Maine has been fairly stagnant at best and the debt-equity and debt-asset ratios aren't improving. As we phase out the direct lending program, a lot of our financial institutions aren't geared to deal with natural resources because they have no history or tradition in that area, and frankly, they have a sense that they don't want to get their feet dirty, and outside of farm credit, that's about it.
    I appreciate Ms. Cooksie and what she is saying and working on the emergencies and prioritizing what she is working on, because, frankly, that is a very high priority as you look around the country with the natural disasters throughout the Northeast, California, Florida. Representative Pomeroy's district in the Midwest was hit last time around. We've just about covered every part of this country with a natural disaster, and I wouldn't wish it on anybody.
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    When we were doing the ice up in Maine it just reminded me of the stuff that brought down the Titanic. That's how thick it was. Three quarters of our State lost all of its power, and some people lost it for 15 days.
    So I am very concerned about that. I'm going to work with the other Members in regard to that. I want to make sure that your priority does not change from working on that and working on the streamlining that you are talking about, because I think that's very important.
    One other issue that I did want to get into was support of the chairman's call for the extension of the statute of limitations. I support Chairman Smith's call to extend the statute of limitations in these cases due to the dealings by the Department and delays in handling of these complaints by the Department. I would hope that Secretary Glickman in his legislation will be able to bring that forward.
    I again want to thank you for coming to Maine, being of assistance there, and recognizing that we haven't got a lot of tools to work with, working with me and the rest of the committee Members to make sure that we give you the resources that you can turn around and help the farmers with, because I think it really has been a shame as to what has happened. We certainly don't want to see them come down through these things again.
    If you care to respond, you are more than welcome to.
    Mr. SCHUMACHER. On one issue, Congressman. As you know, we have been up a fair bit to Maine, and I'm coming up again April 3 with the deputy. But I would like to pick up on one important comment, and that is we would like to work much more with you and the committee on the guarantee operations, and why haven't commercial banks, for example, in your State recognized the importance of agriculture and participated? Is it partly our problem in not reaching out to them? I think we have to think about this.
    Perhaps at the meetings we will be having April 3 we could have some bankers there and explore this a bit more. The stock market keeps going up pretty good for the commercial bankers, and are they properly servicing an important constituency and good borrowers? The debt-asset ratio. We have now $1 trillion in assets in agriculture, and the debt continues to decline to 14.6. So they are very good credit in the commercial sense. But why is it the commercial bankers are not recognizing in their loan portfolios the importance of sound loans to American farmers? Could we discuss that a bit more?
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    Mr. BALDACCI. I appreciate that very much, Mr. Schumacher. I look forward to discussing and working with you on it.
    I think when I first got here I remember listening to Chairman Pat Roberts, and also the ranking member, Kika de la Garza, and they were talking about the fact that agriculture is sort of the silent success story. The consolidations, the streamlinings, the budget savings and everything that went on before it was popular were being done in agriculture. The exporting has been done in agriculture. Forty percent of our exports are agriculture exports. It just seems like that is our silent success story.
    I always tell people that if it were a defense establishment and we could fence it in, the jobs and the income and everything, we'd be falling all over ourselves to make sure that we did everything we could do to keep it.
    I just don't think that we have gotten that effort. I don't know how that is being done, but I look forward to working with you in that regard.
    Again, keep the priorities there on the emergency. The disaster assistance and the forgiveness is very important. Farmers don't need to get two black eyes and we don't need to be the ones giving it to them.
    Thank you very much, Mr. Chairman.
    Mr. COMBEST. Mr. Pickering.
    Mr. PICKERING. Thank you, Mr. Chairman.
    Mr. Schumacher, I want to join with my colleagues in the concerns that they have raised, but today I would like to focus on one particular issue, and that is the FSA loan guarantee program and the caps that are currently in place on those. I have introduced a bill, the Family Farm Credit Opportunity Act, which would raise the farm operating and ownership caps from the $400,000 and $300,000 levels respectively to $600,000, and then indexing that to inflation in year 2.
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    As we go into the Freedom to Farm era, critical to the farmer's success and competitiveness will be access to capital, good continued research, and open markets.
    The problem we face in Mississippi, particularly in the poultry sector, is where in 1978 and 1984, the last time the caps were changed, you could construct a poultry house for approximately $30,000. Today an average poultry house is $120,000. For economics of scale, most lenders will typically finance a minimum of three to four houses. As you can see, you soon are exceeding the cap, and that opportunity is limited.
    You had just raised the question as to why are the commercial banks not participating in these programs more. One of the barriers is the low caps. I think we need to modernize a program that has worked, with low default rates and high returns.
    The bill I have introduced has good support from the agriculture and the banking community. The American Farm Bureau, the American Banking Association, the National Broiler Council, the Council of State Agriculture Finance Programs have supported this effort and this bill.
    So I would like to work with you and the administration and others on the committee to address this very important issue and my solution, which I think will give us the capital and the credit and access that we need to give out farmers a competitive advantage.
    I am a little bit concerned about the administration's budget. If you put $47 million into the guarantee loan program, that leverages about $2.3 billion in the agricultural marketplace. On the other hand, if you put that money into the direct lending program, the return is much lower, only around $500 million.
    In your view, should we modernize the caps, raise the caps, and is it not a better investment and a better return and a better stewardship to put more money into the loan guarantee program?
    Mr. SCHUMACHER. Thank you, Mr. Pickering.
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    Briefly, the President's budget proposes for this coming year full funding of the guarantee program.
    Let me just take a minute. The caps are $400,000 for guaranteed operating loans and $300,000 for farm ownership loans. We looked into this pretty carefully. We are going to have a letter coming up very shortly. I apologize for the delay, but I am going to get this letter from the Secretary to you very shortly on this important issue. It's an important issue in the South, an important issue in California and some of the other States that have high capital issues.
    If we look at the the past 3 years, the average size guarantee for farm ownership was $165,000 and the average size guarantee operating loan was about $109,000.
    What is interesting is that about only 6 percent of the operating loans in the past 3 fiscal years have been at the statutory limit, indicating a fairly small demand for the increased limits nationally. There may be regional or at State levels additional for this.
    We are still reviewing this internally, and we will come back to you, but to the extent that we move the caps up, this does have a budgetary impact in terms of our overall budget.
    Mr. PICKERING. This gets back into an issue of stewardship and responsibility. You're familiar with the biblical parable of where the talents are given to the individuals. One buries his talent; one uses his talent sparingly; one invests his talent wisely, and there is a tenfold return. On the loan guarantee program there is a 50 to 1 return on the money that we put into that program. This return is more than 10 times what we got in the direct lending program.
    If we are to be good stewards, and the example was the one that had the highest return was the good example that we should follow, don't you think it would be better to invest our money in the loan guarantee program where we do have the highest return, the most leverage, and the maximum amount of money put into the agriculture marketplace which benefits local lenders and our farmers?
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    Mr. SCHUMACHER. The guarantee program is not fully operating to its total limits. One of the issues is to make this program work better with the low doc that Carolyn is talking about and getting the preferred guarantee program up and running. So we have a lot of work to do on the guarantee program. We look forward to sharing some of those ideas with you, and we will get this letter back to you shortly.
    Mr. PICKERING. I do hope there is a national solution here, but if not, at least a regional solution for California and the Southeast where we have these problems. Poultry is now the largest single segment of our agriculture economy in Mississippi, and that is where we are having the construction of these houses. Commercial lenders, private lenders want to do more, but they are bumping into these caps, and it's a barrier to the expansion and the continued growth in this segment. We need to do something about it.
    Mr. COMBEST. Mrs. Clayton.
    Mrs. CLAYTON. Thank you, Mr. Chairman. I want to thank you for having this hearing and also for your leadership on this issue and in considering a legislative correction to what the 1996 farm bill I think inadvertently did but which nevertheless has severely affected a lot of the farmers in the area.
    Let me just say parenthetically, I think the issue that many of my colleagues have talked about, the disaster fund, I think many of us have suffered throughout, those of us in the Southeast, particularly North Carolina. When they went to the disaster they found they weren't considered a business and didn't have the same amount of access to relief that their neighbors would have if they were under HUD or a business person downtown. I'm not sure what the answer is, but I certainly want to be on record as saying we ought to look at a resolution.
    The farm credit issue that we are addressing today I think is particularly poignant for small farmers. Small farmers have changed drastically over the decades, the last 4 decades in particular. We have gone from having 2 million farmers, 2.4 million really, with less than 200 acres in 1959, and by 1978 there were 1.3 million small farmers. All farmers now, we only have about 1.9 million. The latest data we have is the 1992. Of that 1.9 million farmers said to be operating in 1992, our current data, less than 1 percent of those are minority farmers.
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    There are many reasons why all these farmers have found themselves in decline and why we find less farmers. Among them obviously is the globalization, the vertical integration, the technology, but access to capital is the main stumbling block. If small farmers don't have access to capital, they cannot operate and they go out of business. It is difficult for them to have that opportunity.
    Then when you consider the documented discrimination of lending from USDA to minority farmers, you know that has severely been a barrier, not only for their existence, but for any opportunity.
    When you combine all of the forces facing small farmers and particularly minority farmers, it is no wonder that they are holding their breath to see whether they are going to get relief through Congress this year for operating loans or for their guarantee loans. The answer is really no, because this year is gone. Hopefully we can do something during this session of Congress that would be in place for next year.
    I had a non-minority farmer call me last week to say, we have been farming more than 200 years and we have had one bad loan with USDA. It was a disaster loan. He's a peanut farmer and a cotton farmer and small grain farmer. He and his sons have been farming. He cannot get an equity loan. He says he has equity over and above the claim that USDA has of $178,000.
    His bank wants to lend him money. His bank will lend him money for a short term, but a long-range loan, he can't get that loan. The lending institution wants to participate in the guarantee loan, but because of the barrier of the 1996 farm loan, he is precluded from having a cooperative lender who would like to participate with him. They know he's a good risk. They have been farming in that community; his father before him, his grandfather, and his great grandfather. Now he and his sons are farming.
    That story can be repeated over and over again throughout the United States, farmers and ranchers who desperately want to have sufficient capital and resources just to go on farming.
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    What makes it even more pathetic is USDA is supposed to be the lender of last resort. If these farmers are precluded from getting it, you know that larger farmers certainly are having difficulties getting loans from USDA.
    I think USDA has not only an opportunity to make this correction of 1996, but USDA has an opportunity to make some corrections for their documented discrimination.
    I was very pleased to hear the chairman understand the issue well enough to know that part of the reason the statute has expired is indeed the failure of USDA to investigate these cases, or just really ignoring that those cases were there; the failure to have an implementation structure and investigative structure that would allow these cases to be dealt with within the prescribed statute of limitations.
    I'm not sure if my comments beg a question or is are rhetorical statement on my part, but I would certainly want to emphasize, Mr. Chairman, that this bill does not speak to the statute of limitations. This gives us an opportunity, it seems to me, for Congress to make some corrections that not only would alleviate the suffering of many farmers throughout the United States, particularly small farmers and ranchers, but it also allows us to make whole, in some small way, those farmers that have been discriminated against and indeed have been brought into bad credit because USDA has been discriminating against them, taken their land, and now they are barred from that.
    I think this is a unique opportunity, and I hope my colleagues will join with the chairman and others to try to find a remedy to make sure that we correct that.
    Thank you, Mr. Chairman.
    Mr. COMBEST. Thank you.
    Mr. Cooksey.
    Dr. COOKSEY. Thank you, Mr. Chairman.
    Mrs. Cooksie, I like the sound of your name.
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    Ms. COOKSIE. I like yours.
    Dr. COOKSEY. So I will direct my questions at you. I have a wife and three daughters. So I'm used to looking to women for advice and guidance.
    Looking at your testimony, it's my understanding that the amount in direct loans is $11.7 billion and guaranteed loans is $6.5 billion, which totals $18 billion, and about $2 billion is delinquent. If you were to make some changes, make it easier for people to borrow money again, people who have taken write-downs, have you estimated what the total cost would be in addition to this $18 billion in additional money that would be available to farmers both in direct loans and guaranteed loans?
    Ms. COOKSIE. You mean if the debt forgiveness criteria went out and if you got one debt forgiveness you could come back in?
    Dr. COOKSEY. Yes. I realize there are several options. For example, right now you allow one write-down. Say you allowed two, if that were the scenario, or if you allowed some other options on the bankruptcy issue.
    Ms. COOKSIE. It's very hard to say. Since 1989 we have written down in some type of debt forgiveness for about 73,0000 farmers.
    Dr. COOKSEY. How much is that in dollars?
    Ms. COOKSIE. I'm not sure how much it is. We'll have to get that.
    Dr. COOKSEY. A billion, $2 billion, $3 billion, if you would guess?
    Ms. COOKSIE. It's over $14 billion.
    On the books now from that 73,000 borrowers, 12,000 are still on the books. Those are active borrowers still with us even though they had some type of debt forgiveness. If those farmers, the 12,000, wanted some other type of loan, we don't know how many farmers between the 73,000 that got some type of debt forgiveness and the 12,000 still on the books would still want to come to us for some type of loan.
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    I imagine because of the bad disaster year that we have had that it would be a high number, because remember, if you've had some type of debt forgiveness right now with us, you still can't get an emergency loan. So there are lots of farmers out there that we are not able to help with emergency loans because they got in the past some type of debt forgiveness.
    It would be hard to come up with any kind of realistic number, to know what the customer base would be if we lifted the ban.
    Dr. COOKSEY. It would probably be at least $5 billion, do you think?
    Ms. COOKSIE. I think probably more.
    Dr. COOKSEY. Closer to 10?
    Ms. COOKSIE. Closer to 15 or 20.
    Dr. COOKSEY. By coincidence, the amount that is being asked for the IMF is $18 billion. I have some problems with that, quite frankly, particularly because of rogue leaders like Suharto in Indonesia. I happen to have been in southeast Asia a number of times. There is no way to justify giving those people IMF funding. Anyway, that's neither here nor there. I would rather give it to our farmers. But still, capitalism, market forces do work better than any of the alternative systems.
    I quite frankly have some problems with our existing bankruptcy laws. The only people that benefit from the existing bankruptcy laws are the people that repeatedly walk away from their loans, and the lawyers. Of course the lawyers benefit. They win on all sides of the issue.
    On the other hand, there are farmers in my district who were advised to take write-downs back in the 1980's. They did that in good faith, thinking that that was the proper thing to do, and they've been caught in a lurch now that they cannot get an additional loan. They got it for that one year, and now for the second year they are hanging out to dry. It's a problem. So I'm sympathetic to the thrust of your request. On the other hand, there are taxpayers that are funding these loans.
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    Thank you for being here. It's good to meet you. I'm glad there is another Cooksie on the Hill.
    Ms. COOKSIE. Thanks.
    Dr. COOKSEY. Thank you, Mr. Chairman.
    Mr. COMBEST. Thank you, Mr. Cooksey.
    Mr. Farr.
    Mr. FARR. Thank you, Mr. Chairman. You have seen there is quite a bit of interest in this hearing, and I appreciate the opportunity to participate.
    I've heard a lot of discussion today. I was just thinking that we do an awful lot of Washington-speak in this room. Ms. Cooksie, let me tell you about a problem and hopefully you can handle it for me. Here is what we have done.
    We had a disaster that started February 2 in California with the rain. The President declared it a national Federal disaster. FEMA went on the air and put out their telephone numbers to call. Radio and television covered it. The USDA put out numbers, saying if you have any disaster problems, call us. So the world knows that if you need help, turn to the Federal Government.
    I have a farmer in the Pajaro Valley who planted 80 acres of strawberries. The cost of planting strawberries is about $12,000 to $15,000 per acre. So he had about $720,000 in the ground. The river came in and wiped out 68 acres of it. He has no money. There is enough soil to get back in there.
    So he's called us and asked us for help. He's applied for a production loss loan, but the loan can't be processed until next November, when the amount of the crop loss can be determined.
    The problem is he grows strawberries. Strawberries are a continually harvested plant. They harvest it almost all year round. Starting in March, right now, strawberries are being harvested until next October. He can't wait until next November.
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    He's also applied for the USDA's physical loss program, but he probably is ineligible for that because he can easily get a loan on physical loss from a bank. The problem is, in order to qualify, he has to be rejected by three banks before he can be eligible for the physical loss.
    I don't know whether you have ever applied for a loan, but normally it takes about 30 days under the best of circumstances. So if you are going to apply to three banks and get three rejections, you're talking about 90 days as a minimum amount of time. The season, as I said, is ticking at the same time.
    He's also applied for the noninsured crop assistance, which is a grant program, but he's ineligible because his farm gross value is over $2 million. He's got probably in this land alone about $1.2 million in his 80 acres.
    How can you help him? The Government has indicated it will. It has advertised; it has given him telephone numbers; everybody sent him things in the mail. And we're here to help. What can you do to help him?
    Ms. COOKSIE. My staff has just indicated that they have talked to California about this particular gentleman and his situation. The only thing we can do now is make him a physical loss loan. Unfortunately, the test for credit where he has to go to other banks and bring their rejection into us before we can make him a loan is statutory, and that has to be done before we can even make him the physical loss loan. That is a problem.
    We do believe we can make him a physical loss loan if we can get the banks to expedite saying whether they will give him credit or not.
    Mr. FARR. What did you call it, a physical loss?
    Ms. COOKSIE. Physical loss.
    Mr. FARR. What is the physical part of the physical loss program?
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    Ms. COOKSIE. That's the loss of the strawberries.
    Mr. FARR. It's the crop?
    Ms. COOKSIE. Right.
    Mr. FARR. Not just the physical structures?
    Ms. COOKSIE. It's just for the plants.
    Mr. FARR. Under that program, if we can expedite the denials, the rejections——
    Ms. COOKSIE. If the banks will expedite their rejections, we can go ahead and make him the loan.
    Mr. FARR. Who can I talk to in your Department and follow through on this?
    Ms. COOKSIE. Me. Call me.
    Mr. FARR. Thank you.
    As you hear the frustrations of Earl Pomeroy and Mr. Peterson and Mr. Chambliss and Mr. Baldacci, one of the things that I would hope on this committee for the problems that exist that you heard about and that the farmers are bringing back to us is that the administration could design a bill that will fix it all. The only thing we have is sort of this three rejection letter from the Secretary. I don't think that has been most of the problems I've heard today. You hear more than we do about what's broke that needs fixing, but we can fix it if we hear how to fix it.
    I think the chairman would appreciate it if you could give us some draft legislation on how to fix all these things so that we wouldn't have to bring these individual problems to you every time there is a disaster. We can go a long way to making this process work and indeed developing full faith and credit in the Government, which is what we are trying to do when we advertise to everybody that if you need help in a disaster, call us.
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    Thank you.
    Mr. COMBEST. Thank you, Mr. Farr.
    Mr. Berry.
    Mr. BERRY. Thank you, Mr. Chairman. I appreciate very much you holding this hearing. I'll make this very brief. I have to mention that I think that what I consider to be the total breakdown in morale of FSA to be a part of this problem. That has happened over the last couple of years, and I am very concerned about the direction I see the agency going in. I think it needs to be looked at by this committee.
    Long term, I think the only solution to this is, if we are going to continue the Government assistance away from agriculture, we have got to have our markets opened up worldwide. I am very concerned that small crops, when you get away from the major bulk commodities, don't get the attention that the others do. We've got to address that much better.
    My question is, where will this $100 million come from?
    Mr. SCHUMACHER. On the supplemental?
    Mr. BERRY. Yes.
    Mr. SCHUMACHER. Carolyn, I think we were looking at a number of issues. Do you want to expand on that?
    Ms. COOKSIE. Frankly, I am not privy to where all of the offset money is coming from. I do know that one of the offset places that the Office of Management and Budget has talked to us about is the guaranteed OL appropriation. I have to tell you I am not sure where all of the offset is coming from.
    Mr. BERRY. Thank you.
    Mr. COMBEST. Is the gentleman finished?
    Mr. BERRY. Yes. Thank you, Mr. Chairman.
    Mr. COMBEST. Thank you, Mr. Berry.
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    Mr. Kelly, I hate for you to sit here all morning and not have a chance to participate in this. I want to ask you about a USDA memorandum from you to all State executive directors on the subject of correspondence with congressional representatives in which you indicate that ''A recent incident has arisen involving direct contacts to Congressional representatives. Due to this, I must remind all of you to follow the proper chain of command in dealing with issues that may arise concerning USDA and FSA programs. All concerns should be sent to the Administrator, via EDSO, who will forward the issue through the proper channels.''
    Can you tell me what that means?
    Mr. KELLY. Yes, Congressman. I sent this memo just in the last week. When there are concerns before a hearing, at least to balance all of the issues that are before the Under Secretary or the Administrator or the Secretary, the first issue ought to be raised within the administration to debate the issues out of various conflicts and various opinions at that point in time. It is at no time trying to muzzle anybody from having communications with their Congressman or delegations.
    From time to time, as you know, there are enough people thinking that one agency is backstabbing the other agency, and if the communication goes outside without knowledge within the administration to address it, it probably doesn't bode well for good government.
    Mr. COMBEST. In terms of our offices being able to contact a State office or county or district offices, that should have no bearing on that?
    Mr. KELLY. Congressman, it should not. We are not trying to put something where they can't contact the county offices. That is not the issue. It is if there are conflicting issues on how to resolve various programs within the Department, a courtesy or at least protocol would tell me the least I ought to know about so those various conflicts can be weighed out and sorted out at some appropriate time.
    Mr. COMBEST. I obviously am not familiar with the instance that you are referring to. If it's an internal agency conflict, I would totally concur. I just wanted to make sure that when we were trying to get information or work through problems in helping our constituents where we would make calls to county offices or district directors or State offices that that was not meant to intend that they were not able to try to help us in the resolution of that problem or giving us information.
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    Mr. KELLY. Congressman, that is correct. I am not trying in any way with regard to resolving program issues that are going on all the time. This was a policy issue that was being debated with another agency within USDA, and on policy issues we encourage those State executive directors to contact us.
    Mr. COMBEST. I was going to say, you're going to have a lot of people calling you at home at night if that was the case.
    Let me ask you about the test that I understand is being given to district directors relative to the credit test. It is my understanding that if they fail three times that they are out of a job. It's my understanding that test is being given to district directors who were formerly associated with ASCS, not district directors who were formerly associated with Farmers Home. Is that correct?
    Mr. KELLY. Congressman, that's correct. It's correct that district directors are being given tests. The purpose of that is that for the administration of all programs in the consolidated Farm Services Agency they need to have some knowledge on agricultural credit.
    I'm not certain there is anyplace in the rule or anything that after three times that they fail they will be out of a job. Quite candidly, those that have been involved in taking the test and going through the training modules have enhanced their knowledge of agricultural credit, which has enhanced their own personal portfolio and learning. I know we don't have anybody that is going up and failing on a test three times.
    Mr. COMBEST. My understanding is that in Louisiana all district directors, even if they formerly were with the Farmers Home Administration Agency, are being given the quiz, whereas in Texas it's only the district directors who were formerly ASCS district directors.
    Mr. SCHUMACHER. Carolyn.
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    Ms. COOKSIE. That is strictly up to the State executive director in the state.
    Mr. COMBEST. If the idea is for the district director, who obviously has to oversee all of the programs that are run by each county FSA office in which they have some jurisdiction, is farm program implementation being given to all district directors as well?
    Ms. COOKSIE. The testing and the modules are driven off of who needs to have loan approval authority. Most of the district directors who came into FSA from Farmers Home previously had and already had loan approval authority. So we put our efforts and time into the district directors who came from ASCS into the consolidated agency of FSA who had no previous knowledge or training in farm loan programs. But it is not limited just to those district directors if the State director so desires. He can give it to anybody he wants to in the state.
    Mr. COMBEST. It's my understanding that in Louisiana more than half of the former Farmers Home Administration district directors have failed the test.
    Ms. COOKSIE. Then at some point they need to be tested again, and if they don't pass the test again, they need to have their loan approval authority withdrawn by the State executive director.
    Mr. COMBEST. Is the same test given to the people in the credit division of Farm Service Agency in Washington?
    Ms. COOKSIE. No. Some of our employees, including myself, have taken the test. It's voluntary.
    Mr. COMBEST. It's voluntary in the States?
    Ms. COOKSIE. No. It's voluntary here in the national office. I have not directed anybody to have to take it, because when we came into FSA we were supposed to have the knowledge, and we don't, for the most part, approve loans from this area; we oversee them. We need to know more than anybody else knows. Agreed. We've got some people who are new employees, who are in upward mobility positions that we are taking through the training. All of our new employees as they come into the national office who don't have as much training as we would like them to have, they are taking the training, yes.
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    Mr. KELLY. Congressman, in the second part of your question you raised about being trained back the other direction as well. In the whole consolidation of the agency it is clearly the intent to get cross training on farm programs and agricultural credit as well, but clearly the highest priority, as shown by this hearing, was to make sure that we got adequate numbers of people trained on the agricultural credit side of the issue first. That became the first priority for the training.
    Mr. COMBEST. Just to reemphasize a point that our office has made on more than one occasion, the concept of a Farm Service Agency is for the farmer to be able to go in and have questions answered. I will just say that the cooperation between the two former agencies still lacks a great deal to be desired in many county offices. The concern and interest about further consolidations of offices and bringing those together, that problem is going to have to be relieved. That cooperation and old turf battles just aren't going to work. It still continues in some areas much worse than it does in others.
    You mentioned, Mr. Kelly, that you weren't aware that anyone after a certain period of time of taking the test was to be relieved of their position. If you become aware of the fact that there is a policy in USDA that is different than that, I think we would be very interested in knowing about that certainly before anyone was relieved of a position because of the testing.
    I guess I just don't totally understand why it is that if this is something that is that importance that it is left up to the State to determine who it is that should or shouldn't be given the test. It would seem that all States should have equal interest in trying to ascertain the competence of the individuals who are making those lending decisions.
    Again, if you are going to do this, I would hope that the same kind of consideration would be given to individuals to make certain they had a complete understanding of the way that those county offices were supposed to operate, including the administration of farm programs and other things.
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    Mr. KELLY. Congressman, I concur with you, especially with regard to the whole issue of the two organizations, how well they are operating and working out there. It's a continuous administrative challenge, especially since we have two different employment systems. We have tried to look at options and perhaps alternatives to get some unanimity among the employees and say we're a new FSA organization.
    Be that as it may, today we have to manage two different systems out there at the present time. Hopefully there will be some things that we can visit with Congress about to alleviate or make it truly one FSA.
    I will go back and check with regard to three strikes you're out, with regard to people who do not pass all of the credit tests.
    Mr. COMBEST. Thank you very much.
    Mr. Pomeroy.
    Mr. POMEROY. Thank you, Mr. Chairman. I thank you for holding the hearing and the questions that you have raised. Especially in light of the extensive reorganization USDA has undertaken, in light of legislative changes made in the 103rd and 104th Congress, it's very appropriate we carefully evaluate how the line function of the agency is operating in light of all the changes that they have to bring on line.
    I want to talk about the bill that they have suggested this committee act on in on expedited basis regarding revisiting the credit title in the farm bill. My first question would be one of clarification. I don't remember as a member of the House Agriculture Committee in the 104th Congress having much discussion on that title and on that restriction. When did that change in the farm bill come about during the legislative process in the last Congress? Do you recall?
    Mr. SCHUMACHER. I don't.
    Carolyn, do you remember when that came up in the farm bill?
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    Ms. COOKSIE. April 1996.
    Mr. POMEROY. I know it was in the farm bill. If memory serves me correctly, it was not in the version that——
    Mr. COMBEST. If the gentleman would yield, I believe that was added in conference.
    Mr. POMEROY. Precisely. Thank you for that, Mr. Chairman. So this was not a provision that this body has ever really had a chance to look at before as a stand-alone feature and debate whether or not the credit tightening provision went too far. In fact, if memory serves me further, it was a provision added at the insistence of the Senate Agriculture Committee Chairman. It may not at all reflect a sound commercial approach taken by the agriculture lending program of USDA.
    Your testimony indicates that at the present time that restriction in the farm bill is a standard even tighter than commercial banks. Is that correct?
    Mr. SCHUMACHER. That is correct, sir.
    Mr. POMEROY. You've also indicated that it will drive some farmers out of farming this coming crop year if this legislation is not passed immediately. Is that correct?
    Mr. SCHUMACHER. It very well may.
    Mr. POMEROY. Do you have a number?
    Mr. SCHUMACHER. I think Ms. Cooksie said there were 73,000 farmers who will fall under this restriction now.
    Is that correct, Carolyn?
    Ms. COOKSIE. Right.
    Mr. SCHUMACHER. That's a lot of farmers, Congressman.
    Mr. POMEROY. That provision which the House Agriculture Committee never even debated, much less considered, in enacting the farm bill will, if not addressed, drive 73,000 farmers forever out of agricultural credit and therefore a number out of agriculture altogether this coming crop year.
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    Mr. SCHUMACHER. Well, 73,000 farmers would not be permitted, if they applied, to receive a USDA loan under the restrictions in this farm bill.
    Is that correct, Carolyn?
    Ms. COOKSIE. Yes.
    Mr. POMEROY. What about an emergency loan?
    Mr. SCHUMACHER. Same.
    Mr. POMEROY. So I've had one write-down in North Dakota and I had a disaster, and I can't access the disaster loan?
    Mr. SCHUMACHER. That is correct, sir.
    Mr. POMEROY. I think this committee has got to evaluate what its intention is to try and use creatively and prudently agriculture programs to keep people in farming or to actually be more restrictive than commercial lending to drive people out of farming.
    I'm very, very concerned about what you've told me about the impact of this legislation and further irritated, frankly, that something of such policy consequence was not specifically debated by this committee as we moved the farm bill forward. It's clearly a very significant stand-alone policy issue. I would hope that we would act quickly on it.
    Having said that about the proposal, I've got a point of peak as well that I want to vent. It involves the disaster loans being made available in North Dakota for something like 46 of the 53 counties which the Secretary determined to be in a disaster situation in light of the repeated crop failures we've had, most specifically last summer.
    The threshold to qualify is a yield history 30 percent below actual production history, the APH measurement used in the crop insurance program.
    Yesterday I was testifying to the Senate Agriculture Committee about the impact of the APH in terms of people being able to get adequate insurance coverage. In the crop insurance program the APH absolutely has ruined the effectiveness of crop insurance in responding to the needs of farmers in my area because the losses they have incurred over the last several years of this wet weather cycle has driven their APH to a point where they can no longer get the coverage levels they need to cover the risk exposure that they have got in a planting year.
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    I'm pleased to hear you, Mr. Under Secretary, saying you are going to revisit it. I cannot tell you how important it is that that be revisited as quickly as possible.
    If that's a problem with Federal Crop Insurance, and it is, having the disaster threshold 30 percent below the Federal crop APH, you've done the press release of making a disaster loan available, but in reality we've had farmers suffer disastrous losses that will not be able to access those emergency loans.
    Do you have a response? Is there any prospect that that threshold could be revisited to make this disaster program work?
    Mr. SCHUMACHER. I think, as Carolyn and Keith point out, the 30 percent is a statutory issue and will require a change by this committee and by Congress.
    Mr. POMEROY. Thirty percent of the Federal Crop Insurance APH?
    Mr. SCHUMACHER. Is that correct, Carolyn?
    Mr. KELLY. Congressman, if it's 30 percent of your loss out there, you start paying on the noninsured crop program, you start paying—really what it all nets out, when it is said and done, if I can use the percentage correctly, is that you are paying of the total loss that is out there, because you suffer the first 50 percent of the loss, and then after that we pay in a proportionate sense up to about 30 percent of the crop. But the first 50 percent is suffered by the producer.
    Mr. POMEROY. I appreciate the technical explanation, but I want to focus on the policy dimension of it. In the old days we had disaster payments when you had a disaster. Now we take the disastrous losses and we figure it into a farmer's APH, driving it down further, preventing them from getting adequate crop insurance. We offer them not a disaster payment, but a disaster loan, and to access it they have to use this artificially low APH target, which doesn't give them loan proceeds that are a meaningful response to their financial plight.
    Do you have a response to that?
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    Ms. COOKSIE. You are right. With the emergency loan, they have to show a 30 percent loss.
    Mr. POMEROY. It's 30 percent as determined in the loan program for North Dakota, as determined in the actual production history of the crop insurance program. I don't believe that is all statutory.
    Ms. COOKSIE. It's not tied to crop insurance. This just says production history.
    Mr. POMEROY. This is where your policy is figured in. I've got the statutory language in front of me. It a 30 percent loss of normal per-acre or per-animal production. The APH for crop insurance is a stand-alone formula that is not working.
    Ms. COOKSIE. That's right. It has nothing to do with this 30 percent.
    Mr. POMEROY. You have cross applied them in terms of trying to implement an emergency loan program in North Dakota, and I'm telling you you've used the wrong mechanism. It has basically eliminated the effectiveness of the disaster loan opportunity.
    Mr. SCHUMACHER. I think that is an important point. I think Carolyn and I and Keith will come up and visit with you on that one, Congressman, because it's something that I frankly myself don't fully understand, and I'm glad you brought it to our attention. Can we come up and visit with you on that one?
    Mr. POMEROY. As soon as possible. Thank you very much.
    Mr. COMBEST. Mr. Minge.
    Mr. MINGE. Thank you. I just had a couple of followup questions I would like to ask. One has to do with some of the mechanics of operating programs, especially programs where the paperwork becomes a burden. As you know, with the smaller staff it becomes even more stressful trying to work things out.
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    I've traveled to many of the FSA offices in the Second Congressional District of Minnesota and encouraged folks to continue to provide the type of service they have and thank them for the work they do and ask if there is anything we can do out here to try to make their life better, trying to find more funds, of course, being part of it, but also trying to make sure that we can streamline the operation where possible.
    Some suggestions have come up. These would include allowing for informal appraisals or using a county assessor for land values if they have very small loans, say below $50,000, rather than a formal appraisal and some of the cost and expense and delay that goes into obtaining that type of an appraisal; getting online credit reports, which is just a simpler way of sort of verifying credit status; not having to verify with the creditor small loans that may exist from one source or another, say loans under $1,000.
    It seems to me that there are a number of things that would be possible, especially if you are looking at what is considered reasonable in commercial banking where they would simply trust to the discretion of the bank how to handle certain matters.
    I'm not saying they shouldn't look for a formal appraisal. Maybe there would be cases where it would absolutely be essential. I'm simply saying some flexibility at the local office level, or maybe having a regional person sign off on it if there is some question they would like to check on.
    Another thing that has come up has to do with beginning farmer programs. I think there is some problem that we have seen in the requirement of the number of years that you may be in farming to qualify for some of the programs. It's my understanding that there is both a 5-year limit and there is a 10-year limit that is in the law. Some of this gets rather technical and confusing, but it's a definition of who is a beginning farmer.
    It's my understanding that there is a provision for operating loans that would define a beginning farmer as someone with less than 5 years of experience, and that for other purposes of farm credit a beginning farmer would be one that has less than 10 years of experience.
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    This type of inconsistency, which apparently is in the law, I think creates some awkwardness in trying to implement the program. The question I would have is if the Department would support an amendment that would make those provisions consistent so that we wouldn't have that sort of a situation.
    If this is something that you are currently aware of, I would appreciate a comment. If not, if you could let us know subsequent to the hearing.
    Mr. SCHUMACHER. I'm going to ask Carolyn to amplify the second question.
    First, there is the streamlining. The chairman and I discussed earlier the tremendous importance of low doc and getting the streamlining moving forward.
    I'd love to come and visit some of the offices in your district when I'm out in the countryside, which I try and do a fair bit, and look at this in a nitty-gritty kind of way: what can we do with computers?
    A lot of the very good suggestions you made. We walk in to get a car loan and they say you can drive out with a car because they have it all sort of streamlined. And they have different credit ratings as well.
    There is a lot of work we can do to make this a lot simpler, especially for the small loans that we are coming forward with. We are going to work very hard. We have committed ourselves in our testimony and we have committed ourselves to this committee to get this thing on track, to streamline it, using all the new technologies and access we have.
    On the beginning farmer loan, my sense, Carolyn, was that we have 3 years of actual experience for beginning farmers. I wasn't aware of the 5- and 10-year limit. Can you expand on that a bit?
    Ms. COOKSIE. The 3-year is for direct farm operating and the OL is 5 years. It is a problem. The statute definition for beginning farmer has been something of great confusion. Part of the problem with part of the definition is what exactly does the term being an operator mean. It's interpreted to mean you are providing management and labor essential to the operation of the business, which means if you were a farm laborer, you probably would not fall under the definition of a beginning farmer, but you would have to not only work on the farm as a laborer, but you would have had to operate and manage it also.
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    We are trying to come up with some definitions to tie down the word ''operate'' a little more. It is a source of a problem for us.
    Mr. MINGE. The slippage that I was informed of has to do with the farm ownership loan as opposed to an operating loan and the 5- and 10-year there. So maybe they simply have the year figures mixed up.
    Would you recommend that that be clarified so it's the same?
    Ms. COOKSIE. I was not in this job when they put that in the statute, but I understand that the Department did support coming up with one term for both programs.
    Mr. MINGE. Another thing that has come up is the fact that an advisory committee on beginning farmers and ranchers was to have been appointed in 1994. We are now in 1998 and we still don't have that committee appointed. The recent USDA Small Farm Commission has again recommended immediate action to have this group constituted. Is there any reason why that group that was supposed to be established according to legislation enacted in 1992 is still not in existence?
    Ms. COOKSIE. We have submitted the total of it and the names to the Department, and we'll have to check and see. I have no idea, quite frankly, why.
    Mr. SCHUMACHER. I'll find out, Mr. Minge, and get back to you on that one.
    Mr. MINGE. With respect to the first question I asked in the second round, we had one of the USDA officials up the first year I sat on this committee, and we asked about simplification, and it's 5 years later. I know you are frustrated. We share that frustration and would like to work with you to try to overcome whatever obstacles exist.
    Mr. SCHUMACHER. I've committed myself with the chairman and this committee. In my previous career I was a long time in banking, and it's something I'm quite keen and interested in working on, and it's something we're just going to get done. Working with the chairman and the members, we will get it done, and we'll get it done in a timely fashion, Mr. Minge.
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    Mr. COMBEST. The gentleman's time has expired. I will be happy to come back to you for a third round.
    I have in my hand a U.S. Department of Agriculture notice to State and county offices, entitled ''Acceptable Scores for Credit and Financial Analysis in Farm Management Training.'' It is Notice FC160. Ms. Cooksie signed this.
    It is the notice regarding the testing procedure, and on page 3, paragraph B, retaking exams continued: ''If the minimum acceptable score is not achieved on the second exam, the SED with the assistance of the HRD shall determine the placement or appropriate action for the employee.''
    It gives a contact name here if you have any questions. I'm not sure if that individual is with us. Maybe we could call him and ask him what is supposed to be done.
    Ms. COOKSIE. What that means is that if after the second testing the individual still has not passed the test, the State director and the administrative officer need to decide whether they are going to put this individual through further training or whether they will in fact decide that this individual maybe is not suited for lending and the oversight for lending and decide if there is somewhere else in the organization that this person needs to go to work. Not that he is going to be out the door. Quite definitely, that was never intended.
    Mr. COMBEST. I think we all want to make sure that the people who are given the responsibility of dealing with loans understand the loan program, but I am also concerned that you have got States that are implementing this differently. You have some States that are testing former loan officers and some States that are not. In those States that are testing former loan officers, they are not passing the test at any greater rate, apparently, than those who were not. I want to make sure that the policy is evenhanded throughout the Department.
    Mr. SCHUMACHER. You made this point several times. I have noted this and we will make it consistent.
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    Mr. COMBEST. Thank you.
    In terms of the legislation, during the discussion period when FSA was discussing with committee staff the proposal that would be coming from the Department, there had been a discussion period in there of three forgivenesses, three strikes and you're out, and the legislation, the way that I read it, indicates two. What was the purpose for that change in the thinking.
    Mr. SCHUMACHER. In the proposed legislation I think it indicates where there is a particular issue of medical or settlement on civil rights there is a further exception. Health issue and the settlement on civil rights, there would be an additional potential for forgiveness. This was in the sense of getting a good compromise.
    Mr. COMBEST. For us to impact this, we are going to have to make a change. I am really not certain what realistically we would be able to expect to take to the floor and get passed. I certainly was concerned about the three strikes provisions. I have similar concerns about the two strikes provisions.
    I have been looking at a proposal. It certainly hasn't been introduced, but I've had a number of other Members indicate an interest in it. I would like your comments on this.
    Taking the period of time in which an individual would be disqualified, that would be the period of time that a write-down was encouraged, or provide that provision to allow that to occur, and the implementation of the 1996 farm bill; that if an individual had received one write-down during that period of time, they would not be declared ineligible; but that the loan process for that individual would have to be a guaranteed loan.
    In trying to think through this, we have got to try to prove some responsibility to our colleagues who may not understand this problem quite as much as Members who happen to have a lot of agricultural constituencies.
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    We are trying to make sure that if that individual has had a write-down that they shouldn't be penalized because of a law that provided that as an option at that time. We shouldn't go back and say, well, now we're going to change the rules.
    If that person did have that write-down and they have had a history since that write-down of being credible borrowers and have had a good pay history—that would be pay history to the FSA—and if we go through the guaranteed process, if we make that farmer eligible for the guaranteed process, then you also bring a third party into this, and that is a bank that is participating or would be participating. And they're going to help ensure that that pay history since that write-down has been good.
    I would like your comments on that approach.
    Mr. SCHUMACHER. I used to be commissioner in that great State of the Commonwealth of Massachusetts, and couldn't get commercial banks—that's why I'm so pleased to hear your banks in west Texas are much more responsive. I would have a bit of a concern. It may work in certain areas, but nationally we have a lot of work to do, Mr. Chairman, to get our commercial banks to recognize, as I mentioned to Mr. Baldacci and others, that agriculture is a very sound operation to make, and as they get into more formula lending in some of these banks, that is going to be a difficulty.
    It may be a farm credit system would be more responsive to this, but as a national rule, I would recommend that we stick to the Secretary's submission. I am very concerned that this may work in some areas where the bankers are really attentive to agriculture, but in a lot of other regions I have traveled around the country the banks are being taken over; there is much more concentration; and it may be more difficult. That's my personal view, and I certainly will discuss this with the Secretary when I return.
    Mr. COMBEST. Basically you are concerned that in some areas of the country there is not a large participation in the guarantee program, so consequently people would not be able to receive those loans.
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    Mr. SCHUMACHER. That's my concern, and particularly where they've had a write-down. These 73,000, we don't know how many will come back in again, but I think we ought to get some opportunity for them to come with a direct operating operation, and then we work hard with you and the committee and ourselves to get commercial banks to recognize that family farmers are great credit. The debt-equity ratios are declining. They ought to be there. We need a little more time to work with the banking system, which is getting a little more concentrated right now.
    Mr. COMBEST. Of the 73,000 that you mentioned to Mr. Pomeroy who you think currently fall under this provision, do you have a breakdown of how many of those were one, two or three time write-downs?
    Mr. SCHUMACHER. No, we don't. We'll look into it. If we can find that on our computers, we will come back to you on that.
    Mr. COMBEST. I'm trying to sort of second-guess what I think we are going to have to do if we take this to the floor in order to try to argue for it. I think a logical argument on the other side of the issue, which we are going to have to try to defend, is when we established that provision in the law, if you've had a write-down, there were some criteria that had to be met.
    It had to be basically the course of last resort.

    It also had to be that the write-down would actually be cheaper than foreclosure, which I think was very appropriate. If you foreclosed in a depressed area, the assets which one would get might be basically worthless. Whereas if you could keep this farmer in business, giving him the opportunity and they could establish a pay history, which they had to do, that it would be cheaper in the long run, and it would also help to not depress equipment and land prices. I think that was a very legitimate part of it, but I think it also showed some taxpayer responsibility.
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    I think a legitimate concern is if this individual has had a write-down, we need to make certain that they have had a positive pay history since that time so that we don't end up doing that again.
    It may be in the Secretary's letter to the Speaker. I haven't read line for line of the bill. But how does the Department address that in terms of trying to help ensure that there has been an adequate pay history? Do you mention that that would be one of the requirements for a future loan?
    Mr. SCHUMACHER. I don't recall that's in the bill. Carolyn has said it's not in the bill.
    Mr. COMBEST. Would there be an opposition to having that included in the bill, that the requirement was there that there was a sufficient pay history?
    Mr. SCHUMACHER. Let me think about that for a bit.
    Mr. COMBEST. I'm going to have a hard time taking one to the floor that you would be opposed to having a sufficient pay history. There are some areas of possible discussion in terms of delinquency or lateness of a loan.
    I don't think it is uncommon in agriculture, the way that agriculture works. Many times they will have a creditor, maybe the co-op that sells them fuel or fertilizer or whatever, to run a fairly lengthy period of time longer than what we normally consider in the course of business of being able to pay. It may not be all that concerning to someone carrying the paper if it's 60 days or even 90 days.
    If we try to put a specific date period of time that it cannot be delinquent or past due for more than X number of days, we may create problems that are not really problems. Or we may create a situation for people that really don't have a credit problem. But I think a positive pay history would be something that would be fiscally responsible.
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    In my proposal that I have discussed up to this point the period of time for that write-down would have had to have occurred between the enactment of the legislation that provided for write-downs and the enactment of the farm bill. So actually anyone who has had a write-down since enactment of the most recent farm bill would not be eligible.
    For one thing, I don't think you can go back only a year and a half to establish a really positive pay history for someone who has maybe taken a substantial write-down from USDA.
    My concept in looking at this is substantially more narrow than some of the earlier discussions that USDA has had with committee staff and as the current bill is. Again, I haven't introduced that, but from the standpoint of your taking a look at it and giving your thoughts about it, I would be very happy for you to.
    My main interest is recognizing that there is a potential problem and trying to address it, but in a way that I think is also realistic and feasible that we might be able to see that not only pass in the House but in the Senate, where I think it's going to also have some potentially very strong opposition.
    Mr. SCHUMACHER. This is a very important bill, as we both have discussed, and we'd like to work very closely with you and the committee and the staff to get a good bill out and get it passed with you.
    Mr. COMBEST. The actual bill that the Secretary sent to the Speaker indicated that OMB has reviewed the bill and advises that it's in accord with the administration's program. Is there a cost that has been associated with enactment of the bill as proposed by the Secretary?
    Mr. SCHUMACHER. My sense from the staff is that OMB is scoring it, as is the Department OBPA, as budget neutral.
    Mr. COMBEST. That they are scoring it as budget neutral?
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    Mr. SCHUMACHER. That's my understanding, Mr. Chairman.
    Mr. COMBEST. I would be very interested in getting that breakdown just in terms of trying to determine how many people we are talking about under various proposals, the 73,000, of that number who have only had one write-down or two write-downs, or the ones that would be eligible under your proposal or under our synopsis so we can sort of put a number to the people.
    I think again that given that that period of time was not that lengthy in which they would have to fall under, it would make it much more difficult to try to take a bill in which a person has had multiple write-downs, because that doesn't suggest a real good pay history. That may be one of the biggest arguments.
    I recognize Mr. Smith, if you have any questions.
    Mr. SMITH of Michigan. I have no questions.
    Mr. COMBEST. Do you have any other suggestions or comments you wish to make?
    Mr. SCHUMACHER. I think the importance of this bill that is now before you is the 73,000 farmers. There are a lot of farmers who would like a second chance, Mr. Chairman, and I think this bill gives them the second chance.
    Clearly, as we look at them when they come in to apply for a loan, our staff will be looking at it very carefully in terms of not just general creditworthiness, as any prudent lender would, but giving them a second chance to come forward and continue in the farming operation is a really important issue for us.
    We would like to work with you very closely on some of the exact numbers. Carolyn and I and Keith will break down a bit more the 73,000 so we can respond to Mr. Cooksey's question as well; how many are likely to come in; a little bit more detail on how many write-downs are there so we can work together on that. It's an important issue. I'm glad you raised it.
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    Mr. COMBEST. I want to make sure as we are looking at trying to be able to come together on something that we agree may be passable and also may be helpful.
    Ms. Cooksie, your input in terms of some of the criteria that are used by the Farm Service Agency on determining the competency, on determining the credit history, on determining length of time of delinquency or past due, those would be helpful to us, because obviously if it is written in generic terms but doesn't take into account what your definitions of that are, then it might not quite accomplish the goal. That would be extremely helpful.
    Ms. COOKSIE. Mr. Chairman, my staff and I have written probably to date 150 versions of this debt forgiveness bill. So we probably already have a good idea what you are looking for.
    Mr. COMBEST. You might have one in the file. We can just pull it out and dust it off and introduce it.
    Ms. COOKSIE. That's my point.
    Mr. COMBEST. Thank you again very much for coming today. I appreciate the time you took to put together your information. Thank you very much. The hearing is adjourned.
    [Whereupon at 11:45 a.m. the subcommittee was adjourned, subject to the call of the Chair.]
    [Material submitted for inclusion in the record follows:]
Testimony of August R. Schumacher, Jr.
    Thank you and good morning, Mr. Chairman and members of the Subcommittee. Mr. Kelly, Ms. Cooksie and I appreciate the opportunity to discuss the urgent need for changes to the debt forgiveness limitation provisions of the 1996 farm bill, to brief you on the improvements we are making to the guaranteed loan programs, and to give a status report on program performance.
    Impact of Debt Forgiveness Provisions of the 1996 farm bill
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    Mr. Chairman, resolutions of problems caused by the debt forgiveness limitations instituted by the 1996 farm bill are of critical importance to the Secretary and thousands of family farmers. The farm bill went too far in establishing a lifetime prohibition, without exception, on loans to family farmers who have received debt forgiveness. The one-forgiveness limit is excessively harsh, much harsher than the standards commercial lenders use, and clearly contrary to the mission Congress has given us: to provide credit to creditworthy family farmers who cannot obtain loans elsewhere. This policy means even if a borrower makes one mistake, or has one bout of bad luck and then rehabilitates his or her credit record, USDA, unlike other lenders, still cannot make him or her another loan.
    We agree there should not be a revolving door for people to have debts continually forgiven and receive additional loans. However, eliminating the future possibility of a loan is excessive for those individuals who received debt forgiveness because of events they could not control, particularly extreme weather conditions or a family illness or medical crisis. Moreover, this provision is grossly unfair to the thousands of borrowers who accepted debt forgiveness with the assurance, prescribed by law until 1996, that receiving a writedown or write-off would not affect their ability to receive additional loans.
    Both the Department's Civil Rights Action Team and the Secretary's Commission on Small Farms cited the prohibition as a major barrier to the continued operation of a significant number of small and minority farmers, an essential part of American agriculture. The spring planting season is fast approaching. If we fail to act immediately, many of them, banned from USDA's farm loan programs, will be unable to plant and will be forced out of business, even though they have the ability to repay the loans they need.
    Mr. Chairman, this morning, Secretary Glickman officially transmitted emergency legislation to Congress to repeal this part of the farm bill. The bill would allow creditworthy USDA borrowers to receive a second chance. They would be disqualified from loans only after the second debt forgiveness. It would also allow for a special exception if one of the first two forgivenesses was necessitated by a weather disaster, a family medical crisis or as part of a settlement of a civil rights case.
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    Our proposal would restore some semblance of fairness to those who accepted forgiveness before the 1996 Act, and recognize that a farm lending policy with no provision for any errors or simply bad luck is unfair and unrealistic. I cannot over-emphasize the seriousness of this situation. Mr. Chairman, on behalf of the Secretary and thousands of family farmers, I urge the committee to consider our proposed legislation immediately.
    Improving Credit Availability
    Available sources of credit continue to be a problem for agriculture producers, especially socially disadvantaged farmers. The President and Secretary Glickman have committed to improve credit availability to producers by requesting additional appropriations to provide additional lending.
    In the recent FY 1998 supplemental request, the Department seeks to provide $25 million in additional emergency loans to assist family farmers who have sustained financial losses because of ice storms in the upper northeastern United States, tornadoes in Florida, flooding in California and other natural disasters across the nation.
    We estimate that later this spring we will exhaust some of our loan programs if they are not increased above the amount Congress originally provided. Therefore, the supplemental request also would finance an additional $39 million in farm ownership direct loans, $25 million in additional farm ownership guaranteed loans and $10 million in additional farm operating direct loans. A major portion of these funds is targeted to beginning and socially disadvantaged farmers.
    In the FY 1999 budget request, we are requesting an increase for direct farm ownership loans of $39 million over FY 1998, with 18 percent to be targeted to socially disadvantaged farmers. For direct farm operating loans, we are requesting an additional $10 million over FY 1998, with 12 percent to be targeted to socially disadvantaged farmers. For guaranteed farm ownership loans, we are requesting an increase of $25 million over FY 1998. For guaranteed farm operating loans we propose no increase for FY 1999 over FY 1998.
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    Implementation of Guaranteed Loan Program Improvements
    As you know, Mr. Chairman, with the advice and cooperation of borrowers, private sector lenders, State finance authorities, academia, farm groups, and Farm Service Agency field staff; FSA has embarked on a very ambitious initiative to make major changes in the way the guaranteed loan programs, both operating and ownership, operate.
    We are producing a limited documentation, or ''low doc'', package for loans less than $50,000, to encourage lenders to make more small loans to beginning and limited resource producers. The ''low doc'' package will also reduce processing time, and allow FSA to respond faster to these requests.
    We are also developing standards for the Preferred Lender Program, again, with the cooperation of borrowers and private sector lenders, that will allow us to operate an efficient, effective, and friendlier program which will make more guaranteed credit available to farmers.
    We have another major project underway to streamline our loan regulations and paperwork. This is a massive project, but when finished, the farm loan program procedures will, in effect, be brand new. Right now, FSA has 60 different sets of instructions for these programs. We will reduce, condense, and combine those by a factor of ten. We will reduce the size of the program instructions by one-third, and reduce the number of forms by one-quarter.
    This project is critical. We cannot afford to maintain the complex, obsolete procedures now in place with the staff we have and achieve a reasonable level of customer service. Our goal is to have this completed in late 1999.
    Status of Program Performance
    Finally, Mr. Chairman, I would like to briefly highlight some accomplishments we have made over the past year. In FY 1997, FSA made more than 15,000 direct loans totaling $799 million, and issued 11,948 guarantees totaling $1.57 billion. Assistance to beginning farmers reached a new high of 4,768 direct loans totaling $234 million, and an additional 1,855 guaranteed loans for $215.5 million. I am especially proud of the fact that loans and guarantees to minority and female farmers totaled $163 million, as part of the continuing commitment to address and resolve the civil rights issues confronting the agency and the Department.
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    Allow me for a moment to put these numbers aside to report on the human side of our status of program performance. We have identified many success stories from our overall lending portfolio. For example, a Native American in Minnesota received a socially disadvantaged direct farm ownership loan to buy 330 acres of hay and pasture land. The next year direct operating loans financed 50 steers and a tractor. Six additional loans have been provided that have enabled him to become a successful cattle rancher. The direct operating loans are now being refinanced with guaranteed funds to further expand the operation. Despite tough times in the cattle industry, he has never missed a payment, has expanded his operation to almost 400 head, and is now moving to other commercial credit—accomplishing all of the goals of the program.
    In another instance, a young Illinois farmer got started with FSA's help. Owning only a tractor and renting land, FSA was the only lender that would help. He now operates 1500 acres—800 tillable and the balance in hay and pasture—and raises corn, soybeans and wheat. He also runs a livestock operation with 50 head of cattle. Once unable to get commercial credit, this young man is worth almost $300,000. Most of his operating funds now come from a local lender because with the help of FSA he was able to graduate to commercially available credit. He keeps in contact with the local Farm Loan Manager for FSA, and works with advice and guidance that is offered. In the near future, this young farmer will be purchasing his own farm.
    FSA also developed and implemented a new loan program to support the efforts of cotton farmers to eradicate the boll weevil in fiscal year 1997. The agency loaned $40 million to fund operations in Texas, Mississippi, and a consortium of seven southeastern States. Payments on all of these loans are on schedule, and the delinquency rate is zero.
    This fiscal year, as of February 28, FSA has already provided farmers 6,421 direct loans totaling $306 million and 3,706 guaranteed loans totaling $512 million. The Agency has also made $10 million in additional loans to support boll weevil eradication efforts in Texas, and expects to make additional loans for Tennessee and Mississippi.
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    I want to stress that FSA staff have also been very busy and very effective, in servicing and collecting loans as. While it is important to reach out and to assist those in need of our help, we must also be fiscally responsible and prudent lenders.
    On September 30, 1997, there were $11.754 billion of principal and interest outstanding to 112,150 borrowers. Of the balance outstanding, $1.9 billion, or 16.2 percent of the total was delinquent. We have expanded the use of administrative offsets as required by the Federal Debt Collection Act, collecting more than $21 million on delinquent accounts since September 1, 1997
    During fiscal year 1997, the number of delinquent direct borrowers fell by 20 percent and the amount of outstanding delinquent debt also fell by 16 percent, or $359 million. Net losses and write-offs declined by $543.4 million, a 42 percent reduction over fiscal year 1996.
We are making progress. There are some problems but I believe it is important to put the situation in perspective, to recognize that 91,990 or 82 percent of direct FSA borrowers were current or ahead of schedule on their payments, meeting their obligations, and continuing on the path to financial progress and commercial credit.
    Since FSA is the lender of last resort for farmer and ranchers, a delinquency rate higher than that of a commercial lender is expected, but we believe the delinquency rate is still too high and will continue efforts to reduce it. I assure you that Secretary Glickman is concerned about direct loan delinquencies and has directed us to focus on delinquency reduction. I have personally reviewed the large, million dollar-plus accounts to assure that the focus on collecting and resolving these accounts continues. As you may know, this small group of less than 425 cases accounts for more than one third of the total delinquency. Each FSA State Executive Director has been given ambitious goals to meet in reducing the amount of delinquent dollars outstanding. We believe that the firm, fair, and empathetic approach being employed to address delinquencies will improve borrower success and reduce loan delinquencies and losses. In addition we will review our loan write-off policy to not carry loans on our books longer than is reasonable.
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    Turning to the guaranteed loan portfolio, on September 30, 1997, outstanding FSA guarantees totaled $6.5 billion outstanding to 40,219 farmers, and only 1.78 percent, or $115.6 million, was delinquent. The guaranteed program continues to be a fiscally sound program, with one of the lowest loss rates of any Federal loan guarantee program. Program losses in fiscal year 1997 were only $68.5 million, about 1 percent of outstanding principal.
    Mr. Chairman, in closing, I want to re-emphasize the high priority we place on: (1) fixing the credit provisions of the farm bill; (2) providing more funding for our credit programs this fiscal year; (3) fully funding our FY 1999 budget request. FSA processed a high volume of loans, improved servicing and collections, and helped many farmers this past year. We should not overlook the tremendous accomplishments and hard work of FSA employees. I believe you will agree that Administrator Kelly, Deputy Administrator for Farm Loan Carolyn Cooksie, and the hardworking employees of FSA are building a solid track record of progress.
    We look forward to working with you to achieve the objectives of the loan programs and provide the assistance and service that family farmers so richly deserve.
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