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U.S. House of Representatives,
Committee on Banking and Financial Services,
Washington, DC.

    The committee met, pursuant to call, at 10:05 a.m., in room 2128, Rayburn House Office Building, Hon. James A. Leach, [chairman of the committee], presiding.

    Present: Chairman Leach; Representatives Roukema, Bereuter, Lucas, Sweeney, Biggert, Terry, Green, LaFalce, Frank, Waters, C. Maloney of New York, Bentsen, Mascara, Inslee, Schakowsky, Moore, and Gonzalez.

    Chairman LEACH. The hearing will come to order. The full committee meets today to examine and challenge the Farm Credit Administration's recent National Charter Initiative. The Farm Credit System consists of a nationwide network of borrower-owned cooperative lending institutions that provide credit to farmers and ranchers for land equipment and other farming-related expenses. It is the oldest, but not the largest of the family of Government-sponsored enterprises, popularly referred to as GSEs, that include such major enterprises Fannie Mae and Freddie Mac. The historical mission of the FCS to serve America's farmers and ranchers is credible, indeed of immense consequence to rural America. Although the Banking Committee has broad jurisdiction over GSEs and issues involving credit, financial assistance to various sectors of the economy, it is unlikely that the Farm Credit System would have drawn any serious committee attention during this session had the FCA not decided unilaterally without formal rulemaking to begin issuing national charters to institutions that now operate within specified geographic boundaries.
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    The FCA took this action by issuing a booklet instead of a rule and is wasting no time in moving ahead with its plans. The FCA has promised that various lending associations, as they are called, that if their applications were submitted by this past weekend, September 30, they would be guaranteed timely agency reviews so that new national charters could simultaneously take effect January 1, 2001.

    As of the latest information I have from the FCA, 131 of the 158 FCS direct lending associations or 82.9 percent have already applied for such a charter. Seldom have I witnessed a more blatant instance of administrative agency hubris. The FCA has essentially excused itself from the inconvenience of formal notice and comment procedures which protect the public from administrative mischief.

    On June 23, 2000 I wrote to FCA Chairman Reyna urging him to suspend the National Charter Initiative until proper rulemaking procedures are put in place, and there is adequate opportunity for congressional scrutiny and oversight. In response, Chairman Reyna agreed to publish the FCA booklet in the Federal Register, but made clear that this was not to be interpreted as formal rulemaking. I would like to request unanimous consent that both letters be included in the hearing record. Without objection it is so ordered.

    Chairman LEACH. Since receiving the FCA response, I have asked the General Accounting Office to conduct an independent review of the FCA's decisionmaking procedures and to determine whether the National Charter Initiative is subject to provisions of the Administrative Procedures Act and the Congressional Review Act. We are awaiting the GAO's judgment. Apart from process issues, the substantive issues of this new policy are extraordinary. In a broad context, I would stress that the push for national charters is a reflection of the continual self-generated urge of all GSEs to use their Government-granted privileges to expand the breadth and scope of their activities in ways that distort the American market system. The irony is that this country has the largest, most vibrantly competitive private sector financial system in the world. But without governmental oversight and restraint, GSEs, whether they be in housing or agriculture, have a natural tendency to push into new market skewing areas and activities. The question is whether this fits or distorts our financial system.
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    In the case of the FCA and national charters, I have my doubts about any benefit. The national charters will provide license for expansive out-of-territory lending without a demonstrated public policy purpose or market need. There is also significant risk that FCS institutions will increasingly cater to the activities of large agricultural conglomerates to the disadvantage of the family farmer. In fact, the national charter provides a potential for a large agricultural interest to establish dominant sway over a single FCS institution to serve its needs on a national basis, contrary to the intent of Congress, which established the System to serve family farmers in a generally cooperative fashion. Likewise, a commercial company might approach an FCS entity and suggest it should lend nationwide to itself or its customers in rural or smaller town settings.

    Despite the expressed direction to the FCA board that institutions with national charters must continue to serve the needs of farmers and their local service areas, it is hard to believe that national charters won't risk diluting FCS institutions commitment and capacity to serve local agricultural producers, which should, after all, not only be their first, but their only mission.

    Unfortunately, the FCA may not even now be serving the small farmer well. According to a February 1999 article by the Economic Research Service of the United States Department of Agriculture entitled ''Who Holds Farm Operator Debt?'', the average borrower from the FCS is not the small family farmer. Agricultural Resource Management Survey data said the authors have ''consistently shown that FCS loans are more likely to go to larger farm operations.'' It also goes on to report that FCS borrowers, on average, ''tend to be more financially secure than many other indebted farm operators,'' and that ''indebted farms borrowing primarily from the FCS have higher net worth and somewhat lower leverage ratios than all indebted farmers.'' The irony is that national charters are more likely to accelerate than retard the movement by the FCS away from family farm lending.
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    The FCA has touted the National Charter Initiative as an effort to deregulate and promote intrasystem competition. Questions exist, however, whether national charters will simply facilitate cherry-picking and predatory pricing by large FCS institutions at the expense of local FCS institutions, and magnify the role of Government-privileged institutions at the expense of the private sector. A fundamental change in the character of the FCS from one of local service to unlimited national scope could significantly alter the rural financial landscape, perhaps in ways we can not now anticipate.

    There is also a concern that a shift in national charters can translate into new safety and soundness risks as the FCS institutions venture into geographical areas, which they may be inadequately prepared to assess and manage risk. Historically, real estate management and lending other than the secondary market level is best understood locally and regionally rather than nationally. This new FCS approach defies the American experience. What evidence is there that all Farm Credit System institutions that have applied for national charters are, in fact, competent to implement nationwide lending programs on a safe and sound basis? It is also questionable whether FCA examiners will be adequately prepared to conduct the kinds of safety and soundness exams at institutions which, under a national charter, could engage in a more complex and remote lending operation across the Nation.

    What is particularly troubling is the implication that the concomitant with the establishment of national charters is the reduction of GSE accountability to its historical lending base and the taxpayers who underwrite System assets and risks. Inevitably, nationally-chartered GSEs can be expected to attempt to expand their powers by expanding the scope of lending activities.
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    At issue isn't just the notion that an FCS entity in New York might want to compete with an Iowa FCS entity for Nebraska farm loans, but the prospect that each might get into commercial loans of one kind or another. No one has the foggiest idea how much larger will the demands be than the Treasury's borrowing markets. But if the step contemplated is implemented and if national charters are accompanied by a devolution of GSE decisionmaking on powers, the GSE System could become an even larger and more aggressive financial behemoth.

    Our financial market system could literally be traumatized with Government credit competitively crowding out private markets. Here, let me be clear. The Department of the Treasury should be front and center in decisionmaking related to all GSE efforts to expand their reach. Unfortunately, while expressing generalist concern, Treasury has been AWOL on significant GSE issues, whether it be Farmer Macs unconscionably large arbitrage portfolios, the ludicrous claims of Fannie and Freddie that their multi-billion-dollar bond portfolios are required for liquidity or the FCS's national charters, which could so easily lead to the transformation of an agricultural centric GSE System into one unconstrained by obligations to serve the family farmer.

    The question also arises whether the FCA's National Charter Initiative will result in significant new liabilities to the Nation's taxpayers. Like other GSE's, the Farm Credit System enjoys tax and other benefits, the most significant one being the right to tap governmentally-derived liquidity with the taxpayer remaining the lender of last resort. Although there is an insurance fund and a policy of joint and several liability standing between FCS liabilities and the taxpayer, it is worth recalling that the System needed to be bailed out by Congress in the late 1980's with $4 billion in Federal assistance, although only $1.26 billion of that was drawn because it had overextended itself.
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    The joint and several liability issue also has extraordinary implications for the smaller FCS entities. If a large high flying institution makes a mistake, it will be those associations that stick to their local lending, which will have to pick up the pieces for the System as a whole.

    Now a note about committee jurisdiction. The Agriculture Committee properly has primary jurisdiction of the Farm Credit System. But I would like to be clear that my concerns are not jurisdictional. They are about the basic nature of GSEs and the inevitability of desire of management of systems to attempt to spread their wings and grow beyond their historical mission confines.

    Hence, I have been concerned with efforts of the housing GSEs to get into insurance with the techniques of privatized GSEs, Fannie, Freddie and Farmer Mac to abuse their power with egregious arbitrage and bond purchasing. And as committee Members may recall 4 or 5 years ago, I advanced an amendment in the Economic Growth Arbitrary Paperwork Reduction Act of 1996 to preclude GSEs from associating with federally-insured institutions. The principle of conglomerating GSE power and the advantages that accrued to federally-insured institutions could, in rapid order, have changed the landscape of American finance.

    Let me ask unanimous consent to revise and extend my remarks, because I have quite a bit more to say, but I would just stress as we conclude, that I believe the Treasury of the United States should have primary jurisdiction over virtually every GSE decision related to power. I am pleased with the Treasury statement that has been presented to this hearing, but I will say as strongly as I can, it is an absolute umbrage that the United States Department of the Treasury has refused to testify before this hearing.
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    It is an umbrage that the FCS has gone forth without consulting the United States Department of the Treasury. And as far as I am concerned, the Treasury should be on the board of every GSE, the Treasury should head a working group of all GSE powers, and this Congress and the Executive Branch have to be continually vigilant on the natural tendencies of all GSEs to expand their jurisdictions and their authorities. And this is something that we as a committee have to be concerned with and something that the Executive Branch has to be concerned with. At issue is truly the nature of the financial system. And where we in the United States have the greatest private sector system of credit ever devised on the planet, why we should be precipitating governmental credit allocation in an expanded way is beyond reason, and it is something that is going to be particularly bedevilling as we look at Treasury markets in the years to come.

    Mr. LaFalce, do you have an opening statement?

    Mr. LAFALCE. Thank you very much, Mr. Chairman. I take it this is an issue that you are somewhat interested in.

    Mr. Reyna, we weren't going to have this hearing, but we wanted to see Mr. DeCell since he had been here so often with Secretary Cuomo, so we thought we will have to conjure up some reason to bring you in.

    The Chairman has decided, and I think wisely and appropriately, to sponsor a review of the Farm Credit System in the waning days of this session. Our committee has been involved in this Congress in reviewing government-sponsored enterprises. And one feature of the review has been GSE impact on non-GSEs where there is some overlap of territory or business interest. In the two most prominent cases of Fannie and Freddie, our committee has legislative jurisdiction over both the GSEs and the non-GSEs involved. Historically, the Farm Credit System, the oldest of the GSEs has not been under the primary jurisdiction of this panel. However, I think it should be. And certainly its activities do impact non GSEs, which unquestionably are commercial banks and to a much more limited extent savings and loan, savings banks, credit unions, and so forth.
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    There is also some question since the passage of last year's financial organization law that this permission for more home Federal Home Loan Bank activities in the agricultural sector, about how the Federal Home Loan Banks' activities might be interfacing with that sector. The trigger for today's hearing has been the new approach of the Farm Credit Administration, the regulator of the FCS, to previous limits on the geographic lending areas of the various components of that system. These elements have long been legalistically complex and various, but basically I believe the rule with a number of exceptions has been that components have had defined lending areas, both with respect to geography and type of loan.

    For example, Cole Bank has a national charter to provide financial services to farmer-owned cooperatives and rural utility systems throughout the country, and it has regional banking centers throughout the country. However, and additionally its regional office in the Northeast lends to farm credit associations which are involved in actual farming production and short-term lending.

    On the other hand, the Farm Credit Bank of Texas provides long-term financing to Alabama, Louisiana, Mississippi and Texas. In short, an intermediate-term financing is also provided by Texas and parts of Louisiana and New Mexico. These are just a few of the examples of varieties, the diversities encountered within this system.

    One of my larger interests in these hearings is that they displayed considerable complexity of how this GSE functions. Growth of lending GSEs in general is a constant point of interest in this committee. And how this particular one operates is really a must to understand for us if we are to keep track of how private entities under our jurisdiction are to be affected, and the overall impact of the lending GSEs on the financial system.
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    This year the Farm Credit Administration issued its National Charter Booklet, which eventually was given a notice and request for comment in the Federal Register on July 20. The Booklet and the actions taken by the FCA pursuant to a number of internal FCA decisions amended the usual FCS standard as to limited geographic lending areas, and there was no formal rulemaking involved, as I understand it. Hence, the position of the FCA, as I understand it, is that none is required. But some have strongly questioned the legal propriety of that assertion, and I believe today's hearings will cover this issue of procedure fairly carefully. My mind is open as the contentions of the affected non-GSEs that these developments have adversely and unfairly impacted them.

    For as with other GSEs, the Farm Credit System is given certain seeming advantages in their operations. However, most are mindful that in some regions, especially in New York, New Jersey, New England, the FCS is the primary provider of agricultural credit, in some measure due to historical reasons through the absence of rural commercial banks. And from that point of view, having components of the FCS from other parts of the Nation providing credit in the Northeast, a result of the FCS's National Charter Initiative, may help areas with economies which are not as vibrant as they should be. So with this open mind, I look forward to the testimony of the witnesses. I thank the Chair.

    Chairman LEACH. Mrs. Roukema.

    Mrs. ROUKEMA. Mr. Chairman, I don't have a formal opening statement, but I do want to observe that while this is an unusual topic for our Banking Committee, I certainly do appreciate the fact that you articulately and intelligently outlined the problems of the parallels and the overlap with our concerns about GSEs that have already been under intensive discussions in this committee. These issues of concern regarding this Farm Credit System also relate to the commercial banks.
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    But in any case, Mr. Chairman, I want to congratulate you for focussing on this, for taking the initiative and for making it clear that we want to not only discuss policy issues, but also the fundamental legal questions that are here. Certainly as you have correctly stated and as Mr. LaFalce has correctly stated, the fundamental question is, and that we are going to address first thing this morning, is how the decision to issue national charters was made without a formal rulemaking process. That is very perplexing. In any case, I am most anxious to work with you, and again, to continue my intense interest on GSEs.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mrs. Roukema. Anyone else on the Democratic side?

    Ms. WATERS. Mr. Chairman, I have a statement I would like to submit for the record. I must say that today's subject matter is of interest to me, because we have in the past year had individuals coming to us trying to get us involved with the Farm Credit System and advising us about what it is and what it is not. I am hopeful that today we can hear something about a report that was issued last fall by the Department of Ag that concluded that the FCS makes very few guaranteed loans to socially disadvantaged farmers.

    The report with which today's panelists must be familiar suggests that in at least nine States, including Illinois, Indiana, Iowa, Nebraska, Ohio, Pennsylvania, South Dakota, Wyoming and Utah, FCS made no such loans to socially disadvantaged farmers. I want to try and understand why this is so. And raise the question if this lack of service to the underserved and socially disadvantaged isn't merely a function of population demographics.
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    And so I am anxious to hear much more about the System and I am concerned about, of course, the rulemaking and the attempt to issue inchoatus without rulemaking. So I will submit my full statement for the record and reserve any questions I may have until the appropriate time.

    Chairman LEACH. Well, thank you very much.

    Mr. Bereuter.

    Mr. BEREUTER. Thank you very much, Mr. Chairman. I want to thank and you Ranking Member, Mr. LaFalce, for holding this hearing on the Farm Credit Administration's National Charter Initiative, and I thank the witnesses in advance for their testimony. As the Chairman knows, we have a very controversial markup going on in our other committee, but I will be here for as much as I can, because I think this is a very important hearing.

    I would like to enter the following two items in the committee record of this hearing and I ask unanimous consent to do so, a letter that this Member sent to Chairman Reyna on September 27, 2000 and the copy of Section 1.1, the Farm Credit Act of 1971, which is entitled policies and objectives.

    Chairman LEACH. Without objection, both of those will be accepted.

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    Mr. BEREUTER. Thank you, Mr. Chairman.

    I believe there are at least two fundamental questions that need to be addressed at this hearing: One, does the Farm Credit Act of 1971, as amended, allow the FCA to issue the National Charter Booklet without proceeding with the formal rulemaking process? And two, is the FCA National Charter, as its being interpreted by the FCA, in the best interest of the small farmer and rancher borrower who participates in the Farm Credit System?

    I agree with most or probably all of the questions and fundamental issues that you have raised, Mr. Chairman. I also appreciate, and I am concerned about the same questions that Ms. Waters has just enunciated. With respect to the first question on procedure, it is my understanding that the FCA contends they are not subject to the statutory notice and comment requirements of the Administrative Procedures Act, because the National Charter puts no such requirements on the FCA institutions.

    Moreover, as I understand it, at a later time, Chairman Reyna did agree to publish a National Charter Booklet in the Federal Register for comment, but stated that this publication was not to be considered as an actual rulemaking. As to the legal question of whether or not the National Charter Booklet should have been subject to actual rulemaking, I was going to reserve judgment on this issue until I hear the testimony of the witnesses.

    However, I would initially make two points: First, the FCA Customer Choice proposal, which was similar to National Charters, was subject to notice and comment before it was withdrawn on November 9, 1998. Second, a basic tenet of American Government is the appropriateness of public oversight, including actions of those Executive agencies like the FCA. On the second fundamental question, is the FCA National Charter in the best interest of small farmers and ranchers? As we have just heard referenced by two of you, the FCA is the oldest GSE, established in 1916, in providing the public benefits or credits to ranchers and borrowers in rural areas.
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    As a result of this public purpose, the FCA institutions enjoy beneficial Federal and State tax treatment and have access to lower cost lendable funds. The FCA was intended to provide credit to small farmers and ranchers. Does a national charter promote this end? In order to answer this question I would like to refer to the comments of a most well-respected agricultural economist at Iowa State University, Dr. Neil Harl. According to Dr. Harl, as quoted in the August 2000 issue of Progressive Farmer, ''A national charter allows farm credit banks to pick off the largest, biggest accounts and it reduces the competition for small accounts.''

    I believe that Dr. Harl's critique is probably very well placed. Under a National Charter proposal, the credit needs of small farmers and ranchers may be passed over by the FCS at the expense of larger more affluent agriculture operations. Moreover, I see the National Charter proposal on its merits as a continuation of a dangerous trend toward nationalization of the FCA to the detriment of the small farmers and ranchers.

    Gradually, I contend the FCA is abandoning the small farm and ranch operations, and small- and medium-sized ranch operations. For example, in August of 1993, I wrote to Mr. James Kirk, the President of the FCS, expressing my opposition to the merger of the Farm Credit banks in Omaha and Spokane. I believe it distanced those organizations from the farmers they were supposed to represent. In addition, in June of 1999, I wrote to Mr. Jack Webster, the President of Farm Credit Services of America, of FLCA PCA of Omaha, Nebraska regarding the 21 FCS field offices that were closed in Iowa, Nebraska and South Dakota.

    In my congressional district, field offices were closed in David City, Fremont, Decatur and York, and I think it makes it more difficult for them to serve farmers and ranchers across the region. To illustrate the possible harm of this national consolidation on small farmers and ranchers, I would like to refer to the Farm Credit Act of 1971, as amended, which authorizes the FCS. It states the following: ''It is the objective of this Act to continue to encourage farmer and rancher borrowers participation in the management, control and ownership of a permanent system of credit for agriculture.''
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    In light of this objective, this nationalization trend seems inconsistent with the objectives of encouraging the participation of small farmers and ranch borrowers. Furthermore, a national charter does not seem consistent with the FCS being a locally controlled cooperative lender. A local farmer and rancher is more likely to be involved in the FCS institution with a local nexus, not some few offices spread across the country.

    Lastly, for these aforementioned reasons, I have a concern with the FCA independently moving forward with their National Charter Booklet, and I look forward to the witness' testimony.

    I am going to be here, Mr. Chairman, for as much as possible of the hearing.

    Thank you, Mr. Chairman.

    Chairman LEACH. Well, thank you very much for that very thoughtful presentation. Does anyone else have any opening comments you would like to make?

    Yes, please, Mr. Gonzalez.

    Mr. GONZALEZ. Mr. Chairman, just a real short word here. And I was discussing this with my colleague, Mr. Moore, and that is, it is my understanding that this may be one of the last hearings of the committee. I wanted to take this opportunity, not that this is not an important matter that we are dealing with today, but to take this opportunity to commend you in the manner in which you have conducted and led us throughout the last couple of years. And the substantive changes that we have made that are truly historical in nature, in large measure as a result of your leadership.
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    I was aware of your reputation before I was elected for many reasons, and it has been a true joy and privilege to serve with you. Thank you.

    Chairman LEACH. Well, heavens, that is unexpected. I appreciate it. I would only comment in another direction. I am absolutely convinced that the Banking Committee holds the finest group of new Members of Congress in a long time, and as I look at you, Charles, I see someone that has your father's integrity, coupled with possibly more a pro-market attitude.

    But I will also, as I will tell you on my side, I am disproportionately appreciative of the extraordinarily strong leadership of our new Members. And this is a committee where the new Members have dominated, and I think it has been healthy.

    Mr. Reyna, would you proceed.


    Mr. REYNA. Mr. Chairman, before I begin, I would like to take an opportunity to introduce a few folks that I brought along with me today, specifically Hal DeCell, who has, I understand, been before this committee before, our legislative director; Tom McKenzie, our policy director; Vic Cohen, our legal counsel; Cheryl Macias, who is our chief operating officer; and also Claire Rusk, my senior assistant at the board. I have one special guest with me today, if my son could stand.
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    Chairman LEACH. You are very welcome, sir, and thank you for coming with your father.

    Mr. REYNA. He wanted to see how Government works.

    Chairman LEACH. Well, I apologize to your son if there is an expression of differences of opinion. My only advice is stick with dad no matter what. Please proceed, Mr. Reyna.

    Mr. REYNA. Good morning. Mr. Chairman, Congressman LaFalce.

    Chairman LEACH. Hold it for one second. I would like to ask unanimous consent the statement of Ann Jorgensen, who is on your board, can also be submitted for the record and also request unanimous consent that the statement that is yet to arrive from the Farmers Union be allowed to be presented to the record. Without objection, it is so ordered.

    Chairman LEACH. Mr. Reyna.

    Mr. REYNA. Thank you, Mr. Chairman, Congressman LaFalce, Members of the House Banking and Financial Services Committee. I am Michael Reyna, Chairman and Chief Executive Officer of the Farm Credit Administration. Thank you for the opportunity to address your committee regarding structural changes occurring within the Farm Credit System. As requested, I provided the committee with written testimony for today's hearing. I believe my written testimony responds to the questions raised in your letter of invitation. With your consent, Mr. Chairman, I would like to make a brief opening statement and respond to the questions from you and the committee.
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    Chairman LEACH. Fair enough. Without objection, any fuller statement will be presented for the record.

    Mr. REYNA. As you may know, the Farm Credit Administration is an independent Executive Branch agency mandated to oversee the safety and soundness of the Farm Credit System. The agency is governed by a bipartisan 3-person board. Members are appointed by the President and confirmed by the Senate to 6-year terms. The Farm Credit System is a nationwide network of about 150 lending institutions cooperatively owned by farmers and ranchers that borrow from them, and seven banks that fund those institutions. One of seven banks also provides financing needs for cooperatives that serve agriculture.

    System institutions generally operate within charter territories established by the Farm Credit Administration. Collectively, the System has a total of about $89 billion in assets. The Farm Credit Act states that the System was created as a permanent system of credit for agriculture to provide for an adequate and flexible flow of money into rural areas for the purposes of improving the income and well being of America's farmers and ranchers. A key objective of the Act is to modernize and improve the authorizations and means for furnishing such credit.

    By law, System institutions must be responsive to all types of agricultural producers having a basis for credit by providing equitable and competitive interest rates. The System institutions have a special congressional mandate to develop and implement programs targeted at young, beginning and small farmers and ranchers. The FCA is charged with responsibility for implementing this Act.
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    In May of this year, our board of directors issued a booklet entitled ''National Charters,'' which communicated the board's willingness to consider granting expanded charters to direct lenders within the System. The board later published this booklet in the Federal Register and invited comment on this topic. Approximately 1,000 comments were received in response to our invitation. Agency staff is currently analyzing and evaluating these comments. The board will carefully weigh these comments before any action is taken on any pending charter application. Both policy and process concerns have been raised regarding FCA's National Charter Initiative, and I would like to respond briefly to these concerns.

    The overriding public policy purpose of FCA's National Charter Initiative is to further the safety and soundness of the System by updating and modernizing the System's credit delivery structure. Put simply, this effort would end FCA's practice of generally issuing exclusive territorial charters to System direct lenders. The Farm Credit Act governs the eligibility of borrowers. This effort does not modify or otherwise expand the rules or regulations governing eligibility. Instead, it allows for the extension of the territory where existing authorities can be exercised. Again, this effort does not modify or otherwise expand the rules or regulations governing borrower eligibility.

    The System is overwhelmingly a single sector lender to an industry that is particularly volatile due to prices, weather, pests and disease and other factors. While nothing in this Initiative would change that, it would enable the System institutions to better manage risk by diversifying their operations geographically and by reducing portfolio concentrations of certain commodities.

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    FCA's statutory authority to grant and amend charters is clear and unambiguous and this authority has been reaffirmed in court. With limited exceptions, statutes do not provide for exclusive charters for System institutions. Rather, exclusive charters for direct lenders have been a general practice and policy of the agency. Notwithstanding this fact, there currently are a number of System institution territories that are overchartered and have been for some time, some as much as 10 years.

    None of these areas have posed any safety and soundness concerns. For much of the decade, the FCA board has publicly discussed the modernization of the Farm Credit System, including specifically whether to end the policy of exclusive charters for direct lenders. The board has sought public comment and input from a variety of sources, including the general public, academicians, policy experts and others. The inherent risk resulting from exclusive charters is known and well documented.

    The Secretary of the Treasury and others acknowledge the concentration and geographic risk in the System in its limited structure. Therefore, the issues in the debate are not new. Based upon this debate discussion, the FCA board first considered and later suspended action on efforts to remove notice and consent requirements in our existing regulations. Because of the FCA's regulatory numbering scheme, this effort was commonly referred to as 4070. The practical effect of these regulations is to restrict lending activity outside a direct lender's chartered territory. This is done by requiring a direct lender in one territory to give notice and receive consent from another direct lender before financing a borrower in another chartered territory of the other system institution. Following a general suspension of this effort to repeal 4070 this year, the FCA board did approve the repeal of certain notice and consent provisions relating to loan participations.
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    By repealing these participation provisions, the board authorized System institutions to enter into loan participations with non-system lenders, including community and commercial banks anywhere in the United States. This action is consistent with the board's general efforts to help institutions improve the geographic commodity concentration situation, which will help strengthen their safety and soundness.

    As previously stated, the FCA board distributed the publication entitled ''National Charters,'' notwithstanding the fact that we later published the booklet in the Federal Register and invited comment. Our general counsel has advised and continues to maintain that the booklet has no binding effect, and therefore, is not a rule for purposes of APA. In fact, no System institution is or will be required to submit a national charter application, nor does it constitute a determination on whether to grant a particular association's charter application.

    The booklet itself does not set out any new rules or requirements for institutions. It is a vehicle by which we communicated to the System our willingness to accept applications for national charters and the conditions under which we contemplate granting them. Similarly neither component of the National Charter Initiative, neither the chartering decisions themselves nor the booklet announcing our intention with respect to chartering, are rules under SBREFA.

    Mr. Chairman, by moving to bring down rigid territorial boundaries and thereby reduce geographic and commodity concentration, the board is encouraging System direct lenders to adhere to the age-old adage that it is unwise to place all of your eggs in one basket.

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    Thank you, Mr. Chairman, for the opportunity to appear today. I am pleased to answer any questions at this time.

    Chairman LEACH. Well, thank you very much for your statement and your courtesy in appearing. On page 3 of your testimony, you cite the Treasury's 1990 report on GSEs as one of the justifications for moving to national charters. Yet, the charter's written statement today makes clear it did not recommend national charters or any farm of intra-system competition and it does not ''believe that the diversification at the association level would provide much, if any, diversification gains to the System as a whole.'' It also stated that ''such changes as contemplated may also, over time, tend to diminish the local cooperative nature of that system and have long-term effects on the competitiveness of the agricultural lending markets.''

    And the statement goes on to say, ''particularly they will allow expansion of Government-sponsored enterprises, which are traditionally created to correct a market failure at a time when markets are functioning competitively and even growing.'' And so my question is, did you consult with the Treasury before you went ahead with this?

    Mr. REYNA. We did not consult with the Treasury in recent months, specifically on this issue. One or more Treasury representatives usually attend our monthly board meetings and they are aware of the actions we have been taking, but we did not engage in specific consultation with them on this particular initiative.

    Chairman LEACH. Did Treasury indicate at these monthly board meetings their concerns?

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    Mr. REYNA. No, sir, they did not.

    Chairman LEACH. Did Treasury indicate any concern with the processes that you were developing? After all, there is a rulemaking function, and you have gone forth with something, frankly, that I consider novel for your institution, novel for a GSE, and novel for any administrative agency I have ever heard of to submit a booklet to inform people if they follow the processes of the booklet, that this amounts to a rule, but does not go through the formal rulemaking processes. Does this strike you as a little too cute?

    Mr. REYNA. It is a fair question. What I would say is that, again, the question that you have asked with regard to rulemaking, the board asked our legal counsel, and the advice that we got from our legal counsel was that the booklet is, in essence, a communication and has no binding effect. We are not requiring any institution to apply.

    Because it has no binding effect, it is nothing more than a communication. I would add that this agency has statutory authority to issue and amend charters. It has had that authority all along, and in fact, upward of 2 years ago, we had roughly three pending applications at that time for national charters, which we did not act upon, although we could have based on our existing rules and our existing authority. The purpose of the booklet was to ensure that there was a level playing field among System institutions so that all System institutions were aware that they would have the opportunity to apply for a national charter. Not that they would necessarily get one, but they would have an opportunity to apply for one and generally the effective date at that time.

    Chairman LEACH. And complementary with the booklet were communications to the institutions that timely consideration would be made and then that all of these approvals would be forthcoming on a given date, which is an early date of January 1.
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    And then the background was that the rulemaking process on this subject matter had once been put in place and put in abeyance. I will tell you that when, as one listens to an explanation from the prospective of the FCS, there is a little bit of a case for it. There is never a policy in which there is not a little bit of a case. But how compelling that case is another matter. I mean, to my knowledge, there is no huge national demand for this. To my knowledge, there is no market that is underserved. My concern is what the next obvious step is. Once you have a national charter, then the question becomes one of rulemaking or non-rulemaking, just approvals that are given for activities. And I look at activities that could just splurge. Let me give you some examples. Would an entity in DeWitt, Iowa be approached by the headquarters of a major farm equipment company that says ''Would you fund all our farm equipment sales nationwide tapping into the Government markets?'' Would a Home Depot approach a Farm Credit System institution, saying ''Would you fund all our activities in towns under 5,000?'' Would a housing developer approach a GSE somewhere and say, ''Would you fund all our activities in towns of a given size and under?'' And all of a sudden, you have, through some sort of quiet approval process, a huge new movement of credit, even though, at this point in time, you might say that's not contemplated.

    But, I will tell you it is inconceivable to me that it is not in the back of everybody's mind that you want more activities to get into. And that's the nature of a GSE. And when one is in your position, I can understand that frustration. When one is in the position of the United States Government, one has to ask the question is there a demand? Is it healthier to go toward more governmentally-derived credits or is it healthier to go to more privatized credit markets? You are making basically an implicit case that America's underserved in credit and we ought to be going in a greater direction of new ideas and new thoughts, which are totally not contemplated by initial statute, at a time period in which the record of the Farm Credit System is a little imperfect when it comes to serving the unserved in agriculture.
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    And all I can say is from an administrator's point of view, I can understand why you want to spread your wings. From the public's point of view, this is a classic captive administrator circumstance, and I would stress that there has been a self-evident lack of coordination within the Executive Branch and a judgment that hasn't been applied and should be applied. And I am just frustrated to beat the band. And I just want to ask you, where do you want to take this. Where is the need?

    Mr. REYNA. Mr. Chairman, if I might, a couple of things. When I arrived at the agency, I have been on the board now for close to two years. I have been the Chairman and Chief Executive Officer for the last ten months approximately, as the result of the death of the prior chairperson, as you know, Marsha Martin.

    I laid out, when I had the first opportunity to, several things. I don't lie, I don't cheat and I don't steal. I also laid out to the agency staff that the fundamental rule that I operate by is that we abide by all rules, regulations and statutes. That is what I laid out. And that is the way I have operated. I have operated that way really because of my prior experience in the California legislature as a staff person there and the frustrations that I had and that I know the Members I worked with had with regard to Executive Branch agencies.

    So I don't come to this job as a captive of the System. I wasn't a part of the System as many of the board members have been in the past, and statutes, thanks to this body, make sure that I will not go to work for the System when I leave. So I have only one purpose, and that is the public purpose to ensure the safety and soundness of the System and make sure the System meets its public policy mission. And the regulatory effort that you referred to earlier, and I commented on, known as 4070, or Customer Choice or other provisions, was clearly a regulatory effort, because there are existing regulations that, as I have described, limit the ability of System institutions to make loans outside of their chartered territory without the notice and the consent of another System institution. It is a regulatory barrier. And the board did engage in significant public notice and comment with regard to that rule. And we did suspend it earlier, as I mentioned.
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    The chartering effort that we announced via the booklet, in fact, has drawn more attention to the issue. And that is good. Because otherwise we could have, under existing authorities and rules that we operate by, could have simply, quietly and incrementally issued charter amendments without any notice or public comments.

    So in fact, under my direction, we have tried to be very public for just exactly that purpose. But, with the advice of counsel, we were told that it did not fall within the rulemaking provision of the APA or SBREFA.

    Chairman LEACH. I appreciate that. Let me bring this to an end, because my time has gone on. I would say two things, it appears that the booklet was done in response to some concern that I expressed in a letter that something more formal should be followed, and you were going to go ahead even without it. But second, if the GAO determines that this has not been an appropriately followed process, that is, the law has not been followed, would you withdraw it? Yes or no?

    Mr. REYNA. We would have to see, it would depend upon what they have said. If there is a compelling case, we would have to take that into consideration.

    Chairman LEACH. Fair enough. Let me just conclude in my own way. I personally think it is preposterous to go ahead with these charters absent congressional authorization, absent Treasury Department formal approval, and absent the following of the precise processes as mandated by law. I believe this is an inappropriate idea, improperly made and one with powerful market skewing implications. And I believe the idea should be shelved.
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    Mr. LaFalce.

    Mr. LAFALCE. What's the legal relationship between the Farm Credit Administration and the Department of the Treasury and the Department of Agriculture?

    Mr. REYNA. I'm sorry, Congressman LaFalce, I did not hear the opening part of that question.

    Mr. LAFALCE. What is the legal relationship between the Farm Credit Administration, Farm Credit System, the United States Department of the Treasury and the United States Department of Agriculture?

    Mr. REYNA. It is one of consultation.

    Mr. LAFALCE. Strictly consultation?

    Mr. REYNA. As I understand the statute, that is correct, on an annual basis.

    Mr. LAFALCE. Just on an annual basis? What about these meetings you said the Treasury Department officials were in attendance at?

    Mr. REYNA. We have monthly board meetings at the Farm Credit Administration to discuss policy, act on policy and Treasury representatives are there.
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    Mr. LAFALCE. Are they there simply as observers?

    Mr. REYNA. Yes, sir, that is correct.

    Mr. LAFALCE. Are Department of Agriculture officials there?

    Mr. REYNA. Not on a regular basis, no, sir.

    Mr. LAFALCE. Are they invited?

    Mr. REYNA. We publish an agenda on a monthly basis. We have not issued a specific invitation for their attendance.

    Mr. LAFALCE. How often, how long has it been since you have been the head of the Farm Credit Administration, sir?

    Mr. REYNA. I have been on the board for close to two years, and the Chair and Chief Executive Officer of FCA since January of this year.

    Mr. LAFALCE. All right. Fine. Have you attempted to reach out to any individual in either Treasury or the Department of Agriculture, to sit down with them and consult with them about the direction you want to take your administration in?

    Mr. REYNA. I was an employee, an Administration employee with the Department of Agriculture for six years prior to this job, and I have regular contact and communication with the Department of Agriculture, including the Deputy Secretary Richard Rominger.
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    Mr. LAFALCE. Well, have you sat down with Mr. Rominger in order to discuss the direction that the Farm Credit Administration should go seeking his counsel and advice, even if he has no legal responsibility for you, because one of your primary missions is to be of service to similar constituency?

    Mr. REYNA. That is correct, and we have not set a specific meeting to talk about this particular issue, but we have discussed it on a number of different occasions in passing, and there was no particular concern that was raised.

    Mr. LAFALCE. Well, the Chairman has a good many concerns. I am just wondering if you were writing a new law from scratch. Do you think there should be some role for either Treasury or Agriculture or both with respect to the Farm Credit Administration and FCS, and if so, what might that role be?

    Mr. REYNA. I personally believe that the existing role that requires consultation on a regular basis is an appropriate role. I believe that——

    Mr. LAFALCE. Consultation on a regular basis seems to be pretty undefined though, doesn't it. You can just—if they want to come to a meeting they can, if you want to pick up a phone you can. There doesn't seem to be any structure to it that would drive consultation on important issues, does there?

    Mr. REYNA. You are absolutely correct. And in legislation, a more prescriptive consultation process could be developed.
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    Mr. LAFALCE. Actually you could develop a more prescriptive process in practice. You don't need legislation. We could then codify the existing practice, although we don't have that existing practice to codify right now. Do you think that might be a good idea?

    Mr. REYNA. I am happy to sit down and talk to Treasury or Agriculture or anybody else, and we have, as an agency over the last several years, consulted many policy experts. Dr. Harl has spoken to our board of directors. We are not shy about asking questions and seeking advice.

    Mr. LAFALCE. Other than the legal implications of the Chairman's questions, when you go back home and a relative asks you ''Well, what is the Chairman concerned about?'' What message would you convey? When you leave here, what do you think the chief concern is?

    Mr. REYNA. I think the chief concern as I have heard it, and again, one of the questions that I asked was with regard to process, because fundamentally, I care about the process. I want to make sure that we are abiding by the process. So that is number one. And number two is the potential for expansive, somewhat creative financing outside the basic mission of the System.

    Mr. LAFALCE. OK. Let's just put process aside now and let's go to the substance of it. Try to articulate better what you think the Chairman's concern is with respect to future substantive missions of FCA and FCS. I just want to see what you will take back with you.
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    Mr. REYNA. There is concern that the System which we oversee would venture into unfamiliar territory outside the basic core mission that the System was set up for, specifically relating to agriculture, ag-related business.

    Mr. LAFALCE. Do you think that you should be lending to such entities?

    Mr. REYNA. That has been the subject and initiatives of prior boards. It will be the subject and initiatives coming to our board, and I can assure you that I am going to take a close and careful look at anything that deviates from the basic mission as established by Congress.

    Mr. LAFALCE. Have you been historically in some instances and regions and areas?

    Mr. REYNA. I'm sorry?

    Mr. LAFALCE. Have you been engaged in such lending historically in some regions and some areas and has it been necessary and desirable to do so?

    Mr. REYNA. The prior board of directors, before I arrived, was engaged in a debate over the eligibility of borrowers.

    Mr. LAFALCE. Is this a so-called customer choice proposal?
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    Mr. REYNA. No, even prior to that. It was an issue that involved what types of entities could be loaned to by System institutions.

    Mr. LAFALCE. Give me a summary of the debate on that issue and then give me a summary of the debate on the customer choice proposal.

    Mr. REYNA. Again, I was not present during the prior debate. I do know that it resulted in a lawsuit from the ABA.

    Mr. LAFALCE. No, not what it resulted in. Give me a summary of the debate. Crystallize the issues, pro and con.

    Mr. REYNA. The pro side would be that the System institutions, to remain financially viable, need to identify and finance new types of ventures and borrowers to remain competitive and healthy. That would be the pro side. The con side would be that 4070, the so-called customer choice rule, again, would have enabled System institutions to finance entities outside their current chartered territory. The pro side on that is the market should drive what is occurring.

    If a customer wants to borrow from another Farm Credit institution, they should be allowed to. And under our current regulations they cannot. You are a captive of the Farm Credit institution in the area that you live. You can not, without the consent of that institution, be financed by another Farm Credit System institution. So there is an issue of basic ability of a customer to choose their financial institution.
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    Mr. LAFALCE. How many members are on the board of the Farm Credit Administration?

    Mr. REYNA. We have three members with one vacancy currently.

    Mr. LAFALCE. When was the last time a vacancy was filled?

    Mr. REYNA. That was with my appointment to the board roughly two years ago. We have a current vacancy now.

    Mr. LAFALCE. Has a name been submitted?

    Mr. REYNA. My understanding is that the President has nominated Michael Dunn to the board. That nomination has not come up for a vote in the Senate.

    Mr. LAFALCE. Has a briefing book been prepared by your staff which would articulate and crystallize the issues that a perspective board member would have to deal with? Is there some document that crystalizes issues presently confronting the Farm Credit Administration?

    Mr. REYNA. No sir, there is not. Nor was there one when I was going through my confirmation process.

    Mr. LAFALCE. Forget when you came on. Is there any document that has, under your direction or anybody else's direction, been prepared that says ''these are issues that our board should be grappling with''?
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    Mr. REYNA. We produce an update, a regulatory calendar that's published in the Federal Register that communicates to the public what items are likely to come up on our agenda, the regulatory agenda over the next 12 months. There is not a policy or briefing paper that is attached to that, but there is a calendar so that public——

    Mr. LAFALCE. Is that document that you publish and the issues that are on that document, are they pretty much what I am talking about so far as a briefing book, giving the pros and cons of all the issues that the FCA should be talking about, grappling with, or is that something that is fairly different?

    Mr. REYNA. What we publish, what the board acts upon and what we publish, is a simple 1- to 2-page listing by title.

    Mr. LAFALCE. Because you don't publish everything and have regulations for everything. As a matter of fact, I think one of the criticisms of the Chairman is that you didn't have publications and regulations in that the particular instance he is concerned about. So all I am really trying to get you to do is get a handle on your perception of what the hot button issues are going to be for the Farm Credit Administration within the next year or two, not necessarily what you are publishing by regulation, and so forth, but what questions should you be asking as you go forward?

    And I ask that so you might be helpful to the Congress, because the Congress then should be privy to that so that we could grapple on those same questions with you. I think that might be a good idea. If it exists I would like a copy. If it doesn't exist, I would ask you to come up with some document, OK?
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    Mr. REYNA. Thank you.

    Chairman LEACH. Mr. Bereuter.

    Mr. BEREUTER. Thank you Mr. Chairman.

    Chairman Reyna, I want you to know basically how I feel about the Farm Credit System. To the possible consternation of local commercial banks that are involved in agricultural lending, I have always wanted to see the Farm Credit System represented on Main Street in places like Decatur, York, David City, Fremont, Seward and so on, in competition with local commercial banks. I have wanted to see a few effectively in competition on Main Street America for serving small- and medium-sized family farm operations, and of course, farther west, the ranch operations.

    That is my orientation. It doesn't make local commercial bankers entirely satisfied, of course. I think that is an important competitive arrangement that we need to secure. I think that gradually you have abandoned that role. I think that is explicit. I don't think it is perhaps intended, but as I see what is happening and as I see this nationalization effort, I believe you are moving further down that path of moving to an entirely different type of borrowing customer.

    Now I understand that one of the reasons that you are moving to nationalization is not just competition among the banks, the FCS System banks, but also to suggest that, well, you are broadening the loan portfolio commercially, geographically and so on. And that is an interesting, and on the surface, positive move.
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    But in reality, won't there be exceptional risk associated with the System institutions ranging from far outside of their current territories assuming financial, commodity, weather and other risk with which they are not familiar? I call your attention to the fact that the savings and loan institutions of this country got in trouble when we gave them very broad new additional authorities, and when then operated far outside the geography with which they were familiar. S&Ls in my district and State got in trouble by taking housing projects far away in the desert Southwest, things that they were not familiar with, not to mention just moving far outside of housing. Areas where they had no competence.

    And my concern is that you are, in fact, instead of insulating yourself as an institution, as a System, from greater risk associated with a narrower part of geography, you are moving into an area where you will have banks that are really not familiar with the items that can affect the risk of the operations to which there are lending operations. That is my first question. Perhaps you would like to address it, and I have another.

    Mr. REYNA. Yes, sir. We believe and we will—if an institution comes in and requests a charter, expanded charter, we will have a review of their business plan which will outline how they intend to operate, where they intend to operate, and our examiners will be all over them, I can assure you, as they are now, on a regular in-house examination, as well as updating all of their criteria with regard to capital, assets, management, earnings, and liquidity on a quarterly basis. And we have the statutory and regulatory authority to shut them down if necessary and we will.

    Mr. BEREUTER. I understand that.
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    Mr. REYNA. The business plan will need to address risk for us to sign off on it, in essence. We will need to address how they intend to manage their risk. And whether or not what they are proposing to do is in line with the risk-bearing capacity of this specific institution. And that is the judgment call that is going to be made by the examiners, and we are going to follow it and dog it and take aggressive action if we have to to make sure that system institutions do not get out of bounds.

    Mr. BEREUTER. Chairman Reyna, I want to go to one other question before my light comes on. What is the public policy justification for continuing the tax advantages that Government-sponsored enterprises like your own that compete directly at the retail level with banks and other sources of lending, if those enterprises go national, compete directly with each other as well as with banks and move even further away from the member owners? Aren't you really undermining the rationale for your particular treatment when you move so far away from the member-owners of the System?

    Mr. REYNA. The tax treatment of specific System institutions was decided upon by Congress.

    Mr. BEREUTER. We expected that you were going to be working with the local members and the borrowers that are small farmers and ranchers, and those are middle-sized family operations. That is the justification for it.

    Mr. REYNA. We do not believe there is anything that will change the fundamental mission of the System. In fact, we are a safety and soundness regulator, but we are also a mission regulator. And I can assure you that we will be taking a greater look at how the System meets its mission, given this proposal to mitigate any concerns that you have raised. You made a comment earlier, if I might, in your opening statement with regard to a System institution pulling out of the marketplace in your district. This initiative will allow System institutions to move into the marketplace and serve farmers. It is a positive impact in the marketplace. If there is a System institution that wants to abandon the market, they do so at the risk of having somebody else come in and serve that market that they just walked out on.
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    Mr. BEREUTER. I believe the visibility and the service capacity that you had has been markedly decreased by the consolidation you have gone through. That is my concern. What you are suggesting as an advantage is purely theoretical in judgment and in contradiction to what I see happening. That is my point of view, and I think that is the view of the people that I represent.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Doug.

    Ms. Waters.

    Ms. WATERS. Thank you very much.

    Mr. Chairman, I would first like to take a moment to welcome Mr. Reyna. My staff helped to focus me on my past history with him in the State of California. And I remember him as a highly competent staffer with the Ways and Means Committee of the California State Assembly, and I am pleased to see you here. And sorry we did not have an opportunity to talk prior to your coming today. And I know that you would like to do the best that you can possibly do with the Administration.

    Based on your past reputation, I know that no matter where you are going, you really do feel that it is in the best interest of the people you are trying to serve. So let me just say welcome, and to say to you that I am so sorry that I have not focused on the Farm Credit Administration in the past. Since 1984, I have been involved with agricultural issues one way or the other.
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    Starting back in 1984 when Jessie Jackson first ran for president, one of great issues that he had in his platform had to do with the farm foreclosures, and the fact that many family farmers were losing their farms. And he organized a lot of small farmers all over this country, and it appeared that they really had nowhere to turn. After coming here to the Congress of the United States, the African American farmers had issues that they have been dealing with for many, many years where they could not get loans. They could not get grants. The Civil Rights division of the Department of Agriculture had been disbanded, and as Chairman of the Congressional Black Caucus in the couple of years that I served, I took up some of these issues and we were able to waive the statute of limitations so that we can have some administrative remedies for the problems that African American farmers have faced in being denied.

    Applications literally have gone in the waste basket. And as you know, there was a class action lawsuit that was filed against the Department of Ag by minority farmers because of the way they had been treated. And you know the problems of the county committees and all of that. I guess even though you are new in your role, I keep asking myself where was the Farm Credit Administration in all of this? Where were the associations relative to the extension of credit to these small farmers and these minority farmers? Who are these associations? I see that they are listed in some of the States where we have the most problems, in Alabama and Mississippi and Louisiana. So I guess I have a lot of questions to ask. First, let me ask Mr. Reyna, how big are the boards of associations? How large are they? What size are they?

    Mr. REYNA. They range in size, Congresswoman, from as low as I have seen, 5 to 7 and up to well over 21.

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    Ms. WATERS. This depends on what?

    Mr. REYNA. It depends on the individual institution and how they have organized and chosen to govern.

    Ms. WATERS. Are you familiar with the boards and the associations in Mississippi, Alabama, Louisiana, for example?

    Mr. REYNA. I have met a variety of people through my travels including, probably not all, but some of the board members from those areas.

    Ms. WATERS. Are there any African Americans on any of those boards, do you know?

    Mr. REYNA. No, ma'am, not to my knowledge.

    Ms. WATERS. I see. Based on your limited time, you were with the Department of Agriculture before this, was there any discussion in the Farm Credit Administration about the plight of minority farmers and how did the Farm Credit Administration work with Ag, if at all, to address this issue?

    Mr. REYNA. Again, when I was with the Department of Agriculture, I was not directly involved at the national level with the specific issues. I was involved in California, so there may be other actions that were taken that I am not aware of. But I don't believe that there was close coordination between Farm Credit Administration and the Department of Agriculture specifically with regard to cases involving black farmers.
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    Mrs. WATERS. Is there any relationship between the associations and the county committees? Because the county committees receive the applications of these farmers, and they too do not have any African Americans on the county committees. But did the county committees and the associations work together in any way?

    Mr. REYNA. The boards of directors at the local level and the USDA county committees are separate and distinct legal entities in operations. They may communicate on an informal basis. There is no formal communication between the two, although they do perform somewhat similar roles and have similar responsibilities.

    Mrs. WATERS. I would think that if an application was made at either of those entities, or both, in reviewing those applications, there would be discussions between the county committees and the associations about an individual who may be applying to both entities.

    Mr. REYNA. I want to make sure that I don't suggest there is no cooperation or no coordination. Because the System operates at the retail level like other financial institutions, the System institutions can use loan guarantees that are issued by USDA. And so there would be in some cases instances where a borrower may apply to a Farm Credit System institution and receive a USDA guarantee for the loan that is made to that borrower by the System. So it is a System institution making a loan, and USDA guaranteeing the loan, as USDA guarantees loans to commercial lenders, or by commercial lenders, I should say.

    Ms. WATERS. And I beg your indulgence, Mr. Chairman, because I think that you have made some very strong statements about this effort to issue national charters and your strong disagreement with that. And I have heard some references by Mr. Bereuter to the mission of the Administration. And if the mission of the Administration is to provide access to credit for small farmers and ranchers and women and minorities and disadvantaged, whatever you want to call it, socially disadvantaged farmers and ranchers, it does not appear that that mission has been realized or there appears to be some problems with that mission.
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    Now admittedly, I am not blaming you. This is something that perhaps has developed with the System over a long period of time, that you have maybe exclusion or non-involvement of people to make decisions in policy in the System, and so forth. But it is absolutely striking that nobody seems to know of any African Americans who serve on any of these association boards. And I think at your level, I don't think there has ever been, maybe I am wrong, an African American that served the Farm Credit Administration board. And I don't know, I do know the history of the county committees, and I guess my question is, as a GSE that enjoys support from the taxpayers of this Nation, why should I be concerned about whether or not you have the ability to issue national charters? Why should I be concerned that you should really exist? Why would I even support your existence?

    Mr. REYNA. I would like to believe that the System improves access to credit. It doesn't mean that the System can't do a better job, and it doesn't mean that we as a regulator can't do a better job of ensuring that the System meets its mission, and I am committing to you here today that we will be looking at that.

    Ms. WATERS. How many years has the Farm Credit Administration been in existence?

    Mr. REYNA. The original System was created in 1916. It is the oldest GSE the country has. The FCA was created in 1933.

    Ms. WATERS. If I took a look at the history of who it has served and who it has not served, would I be unhappy?
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    Mr. REYNA. Because you and I have worked closely together before, I would say that you would probably be an unhappy Congresswoman.

    Chairman LEACH. Would the gentlelady yield?

    Statistically, the USDA's own analysis of the Farm Credit System has been, in effect, cherry-picking larger customers. One of my concerns about this new model is that of agriculture customers. Why wouldn't you suddenly start to cherry-pick commercial customers? And if it isn't your desire, it will soon become the desire of those commercial customers. Let me give a bizarre example. I have seen that the Farm Credit System has granted a national charter to a local entity. I am the general counsel at General Motors Corporation. Why wouldn't I go to that local entity and say ''Will you finance all car sales nationwide to towns under 5,000?'' That may not be your immediate thought. You may have rules against it today. But tomorrow, what will those rules be? And when you make these national charters, it is just stunning what their implications are. Now, for example, a little Farm Credit System entity in DeWitt, Iowa, has no desire to make a farm loan in New York or California or South Carolina.

    What is the purpose for having a national charter if it isn't to get into new activities? And so there is this first step, and Mrs. Waters raises a fundamental concern that the Farm Credit System was developed to serve the small family farmer who might be African American, might not be African American. It is hard for me to believe that this new thing that you have in mind isn't anything except one of trying to expand loan portfolios in new areas that have nothing to do with serving a small family farmer.

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    Anyway, Mr. Sweeney, it is your turn.

    Mr. SWEENEY. Thank you, Mr. Chairman.

    Mr. Reyna, welcome. I have listened as intently as I can to this morning's testimony. I unfortunately had to leave briefly, because I had a bill on the floor. And I have heard your basic statement regarding the mission and the need to provide as much flexibility in access and credit for farmers. I recognize a couple of things coming in. Farmers are in great distress whether it is low commodity prices or skyrocketing fuel prices or the poor export market or crop disease, or weather-related catastrophes. We, in Upstate New York, in the district that I represent, have had a string of weather disasters, or whether it is Congress's failure to enact meaningful relief such as death tax reform or some common sense environmental legislation.

    So farmers are under great distress and in need of flexible credit, because their resources are strained and their profits are as tight as profits could be. I also recognize that Farm Credit holds about 55 percent of the share of the New York farm lending market with total farm lending around $1.9 billion. Pretty good numbers, pretty good record. I recognize that excluding credit extended by the Federal Government through the USDA, this market would represent something like 75 percent of the farm lending market in New York.

    So you are important to me in a huge way. And I hear the comments of my Chairman and Mr. Bereuter and John LaFalce, Ranking Member, and other Members, and recognize that the devil is in the details on how we are going to manage risk, because I, as one Member, think the idea of establishing a national charter may have, theoretically, some real positive benefits in order to create greater competition, in order to get better services for farmers. Yet, listening to their comments, I realize there is a level or degree of skepticism. You need to sell us on the fact that this move is a good idea.
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    So in an effort to pursue that, you may have answered this, but I am wondering why did you decide to pursue this initiative now? What was the rationale and what was the great need and what are your projections for increases in flexibility to the farmers, and specifically, small family farmers?

    Mr. REYNA. Again, in my opening statement, I spoke of the overriding public policy rationale as being the safety and soundness of the System through modernizing its credit delivery structure to help the associations better manage the risk. The capital that is held by the associations is held at the local level. And they need the ability to manage the risks. Again, and I mentioned in my opening statement, which you may have heard, following the age-old adage that it is not wise to put all your eggs in one basket.

    So diversification from our perspective makes sense. The issue with regard to national charters is relatively new. But the issue is not new and certainly has been around since the early 1990's, and specifically discussed by this board in 1994 where the issue of non-exclusive charters was raised in the Federal Register and comments were made at that time.

    So this has been an ongoing effort of the board to wrestle with the inherent risk that is present in portfolios where the institution is limited to strict geographic territories that sometimes contain maybe two or three commodities as well. So the problem is compounded. That is the rationale.

    Mr. SWEENEY. Under the current structure and within the National Charter form, answer this question for me: What do you think would happen if commercial banking businesses took a downturn in terms of access to credit by farmers? Contrast the systems.
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    Mr. REYNA. The mission of the Farm Credit System is to be a dependable source of credit for agriculture and rural America through good times and bad. That is the layman's term. The mission of community and commercial banks is not the same. They do not have the same mission. And so hence, in a tough economic time it is possible that they might seek profit opportunities elsewhere, away from agriculture and somewhere else.

    Mr. SWEENEY. Thank you.

    Thank you, Mr. Chairman.

    Chairman LEACH. First, let me thank John. Your comment about the positive role of the FCS is something that I think is very appropriate.

    Yes, Mrs. Maloney.

    Mrs. MALONEY. Thank you very much.

    On page 5 of your statement, you note that, because the National Charter booklet has no binding effect, your general counsel determined that the booklet is not subject to a notice and comment requirement, yet the booklet creates binding actions on those agencies that apply for a national charters. Does this fact appear ironic to you?

    Mr. REYNA. Congresswoman, the short answer is no. And the reason is because it is a voluntary action. We are not requiring them to apply for a national charter. It is a voluntary action. And in it being a voluntary action, they are accepting conditions that go along with that. We are not imposing those as requirements. If a System institution doesn't want a national charter, there are no requirements or conditions.
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    Mrs. MALONEY. I would like to follow up on one of the things that the Chairman said earlier. He said you wouldn't want a national charter unless you wanted to get into new products. And I would like to ask what is the review process for new products now. Would you just be able to create new products on your own or would there be somebody to review them or how would that be handled?

    Mr. REYNA. The way that we operate, the System is the GSE, the Farm Credit System is the GSE, the lender or a series or network of cooperatively owned lending institutions. The role we play is as regulator. And so, with regard to any new products that do not fall within existing regulation or statute, they would have to come through us or Congress to get that authority through regulation from us.

    Mrs. MALONEY. So you could just regulate it yourself without going before Congress?

    Mr. REYNA. No, not exactly. If it is deemed to be within the current statutory structure, then by regulation with full notice and comment, action could be taken by the board. If it is deemed that it is not within the construction of the statutes then we would have to say, ''Sorry, there is a mechanism to go get that authority if you want it.''

    Mrs. MALONEY. Couldn't you just change it? Because your booklet was not subject to a notice and comment requirement, which is usually the way things are done.

    Mr. REYNA. Our charter authority is clearly outlined in the statute that differs from the regulatory process that was used and is used for other rules issuing a charter, not a rule. It is organic to our statute. It is what we do. We have issued charters since the day we were created and we amend charters all the time.
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    Mrs. MALONEY. Aggressive expansion in the 1970's and 1980's led to the near collapse of the Farm Credit System and Congress provided a $4 billion line of credit to make sure there wasn't a failure. Two reasons why the System failed were inadequate experience by System institutions and failure of the regulator to oversee vigorously such expansion. What steps has the Farm Credit Administration taken to prevent a similar result with national charters?

    Mr. REYNA. Probably the most significant step was taken by Congress in the late 1980's by creating a separate independent regulator. The regulator that we now are. Previously there was a governing board, a board of governors that was part and parcel of the System. There was no independence per se. There is now. So that is the very first and foremost significant change that was made by this body and part and parcel with the assistance, that was the cost, the public cost of the assistance that was provided by this body.

    From that time there have been market disciplines, rules by which the system operates, in essence, ensuring that if there are aggressive institutions or lending activity if an institution's performance drops, there are rules that are in place that preclude it from additional borrowing from the capital markets. That is a System-operated set of rules. And in addition, Congress also created an insurance fund that is fully capitalized now, separate and distinct entity.

    Mrs. MALONEY. How much is the insurance fund?

    Mr. REYNA. $1.4 billion, which is, by statute, required to be 2 percent of the loan assets outstanding.
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    Mrs. MALONEY. My time is up. Thank you.

    Chairman LEACH. Thank you for those thoughtful questions.

    Mr. Terry, you have been here since the beginning and I apologize being so long to get to you. And I appreciate your patience.

    Mr. TERRY. That is all right. I know those last two touchdowns.

    Chairman LEACH. Mr. Terry invited me to a football game recently and the Iowa Hawkeyes yeomanly tried. Nebraska did better.

    Mr. TERRY. And we enjoyed your company.

    Sir, let me follow up on your answers to Mr. Bereuter's and Mr. Sweeney's question. Coming from Nebraska, especially the eastern part of the State in our narrowed geographic territory, our predominant crop is corn. I don't know what the exact percentage is, but if it is under 90 percent, I would be surprised. So when I hear comments about safety and soundness and having to diversify, then seeing comments and hearing comments in your prepared text that one of the problems is the high commodity concentrations and loan portfolios because of narrow geographic territories, representing corn in the corn husker State, what I hear is that perhaps there will be a new system that will discriminate, in essence, in some way against the small corn farmers in a small geographic territory. So I want to know what's your vision then to diversify, to reduce the risk of a predominant crop in a narrow geographic territory? What's going to be the basis for decisionmaking? Is it the number of corn bushels in a certain geographic territory? The number of specific loans to farmers? To me it sounds like there is going to be a new system here that could jeopardize the access of small family farmers in a particular geographic region with a predominant crop. What is going to be the basis for this selectivity in order that you achieve your goal of diversity within the portfolio?
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    Mr. REYNA. We believe that if there is a market for corn loans that somebody is going to serve it. That may not be the case now. You could have a corn farmer in Nebraska that wants to borrow from the Farm Credit System, but that Farm Credit System institution doesn't want to loan to that borrower. Under this proposal, the potential exists for other Farm Credit System institutions that may be looking for corn loans or good corn growers to finance, to come in and do just that.

    Mr. TERRY. So what you are saying is the basis will be on a national, not a geographic area. But I still don't think you have really answered my question. What you are saying is there won't be any guidelines per se that every corn farmer in Eastern Nebraska in that small narrow geographic territory will have complete access. How do you achieve your ultimate goal of diversity then, your word, if there isn't some level of reduction of a predominant crop? It seems to me that you, in essence, force those in that territory to go out and loan to alternative crops in that area, so you do not have a predominant crop.

    Mr. REYNA. We create the opportunity when we grant the charter for that institution. Again, they request it. It gives them a better opportunity to manage their risks, and presumably find, using proper loan underwriting standards and the like, to find other types of agriculture that they can finance. We have, as part of the condition that goes along with granting an expanded or national charter, a provision that requires service to your local area. We would put that in place as a condition on those institutions that seek to lend outside their current territory.

    So we do not believe that the Farm Credit System institutions are going to abandon their local area. We are not going to let them do that. Number two, we are creating the opportunity for additional Farm Credit institutions to come in and serve underserved markets.
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    Mr. TERRY. Thank you.

    Chairman LEACH. Well, thank you Mr. Terry.

    There are no Members here, but I want to pick up on a little bit of Mr. Terry's commentary, because I think he has hit upon the preeminent dilemma that is the subject of this hearing. The rationalization for the Farm Credit System action is diversification. That is a very impressive word. Diversification can have only two meanings in this sense. One is to diversify geographically with farm lending. The second is to diversify with commercial lending. Now with regard to the first, and I want to be very precise on this, I know of no demand from any farmer in the State of Iowa, a State that has 25 percent of the country's grade A farmland, 10 percent of the world's, that they lack competition for lending, and that they need more intra-Farm Credit System competition.

    They identify with their local farm credit entity or their local bank, or some might go to an insurance company, some might go to an out-of-town bank. There is a huge diversity in credit. Now we are going to hear from a farm bank from West Branch, Iowa in a minute. I am going to ask that representative the same question. If, in his farm bank, he makes loans in South Carolina, what would the regulators say and do? And I will tell you, sir, they would say, ''You don't know what you are doing, these loans will be classified.''

    The second element of alleged diversification is this rationale—and I shouldn't say ''alleged'' because I think it is the preeminent reason for this rule—implicitly, to expand the wings of the Farm Credit System to get into commercial lending more aggressively. And once that happens, bar the door for what will follow.
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    As you know, sir, the Farm Credit System has been pushing aggressively to get into car lending. What is to stop a Michigan Farm Credit System entity from doing all of GM's, all of Ford's? What is to stop an entity in rural areas? Nothing. You are going to be banged on the door by every smart business in America to finance their products nationwide in rural areas. There is absolutely no competitive need for that, other than one that is market tilting in the American financial market. And one of the great questions is, is there a case for it? Congress very carefully created a series of GSEs in times of need for very precise missions. And those very precise missions are what every GSE wants to get outside of, of which this is an emanation. It doesn't fit the national circumstance.

    Finally, let me just say within agriculture, and this comes to a question in an ancillary way of Mrs. Waters, there is a demand of some big agri-businesses to take advantage of FCS or GSE financing. Bigness is a function of credit. The reason the State of Iowa that I represent no longer is a small hog-producing State is that credit has been given to the large and the Farm Credit System has led the whole movement toward large hog production. That is the direction that national charters take. It is to support a large, for example, North Carolina agri-business to invest in Missouri. It is to support a large California agri-business to invest in Idaho. That is exactly not a niche that Congress ever intended. Congress's intent is to support the small family farmer in difficulty. To support the young new farmer, whether they be African American or not.

    And this whole movement toward national charters has absolutely nothing to do with that. And that is the reason that Iowa's most distinguished economist, Neil Harl at Iowa State University, is suggesting that this will dilute the emphasis toward the small family farmer. And it is all on the basis of diversification, which basically means not just mission creep, but abandonment of mission. And how this can all be done in a process by which a booklet is put out, which has all the ramifications of a rule, that was denied earlier or ran into great trouble is beyond me.
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    And the fact that a general counsel within the Farm Credit System said this might be OK has all of the writing of how do we stretch the law in the most incredulous way from an Executive agency perspective. And I will say to that general counsel this is a problem of hubris in the United States Government in many agencies, but never, in my sitting as a Chairman of a committee, have I seen it in a more egregious way, which assaults the basic mission of institution itself. And however narrow you feel the national charter issue is today, once any GSE gets a national charter, it changes its whole meaning.

    And then the most interesting aspect of it is it involves decisionmaking, and suddenly you have a board that deals with cooperative systems becoming swayed to a community entity that might be a large commercial business, and that just changes the nature of American finance. And what big business wouldn't love to have access to the Government' borrowing markets? And what you are doing is laying forth the possibility that large business in America would be given a new tap into Government financing markets in ways that have never been contemplated by statute and have never been contemplated in relation to the mission that Congress has authorized you to give. And so I want to thank Mr. Terry, in particular, for raising this diversification issue. I think it is the key one. And I will be darned if I can figure out why you are doing this. And I will even be more darned not to figure out why the Executive Branch, represented by the Treasury, isn't up in arms to a greater extent than it is. And I think this is a very symbolic issue. It is also factually a very important one.

    Mr. REYNA. Mr. Chairman I want to thank you for the opportunity to come here today and I want to assure you as my colleague on the board, Ann Jorgensen wrote to you that we will take the questions from today's hearing into consideration before we take any action at all on any pending national charter applications at the agency.
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    Chairman LEACH. Well, that is extremely appreciative and I want to stress that this has been nonpersonal. It has been my experience that every head of every GSE and every regulator of every GSE has wanted to see how far they could go. And it is a natural thing, because all input comes from moving in that direction, and that what is lacking in the American system today is the umbrella of the big picture. And I believe that the big picture is that we should be very careful of expanding GSE missions. And unless there is a proven case that somehow the private sector isn't serving a financial market niche, and if you could come to this committee and say any area in which we seek diversification there is no private sector provision of credit available, I would be much more open-minded. But no one has attempted to make that case. And those are my concerns. Thank you very much, Mr. Reyna.

    Our next panel is composed of Mr. Dale Torpey, President of the Community State Bank in West Branch, Iowa on behalf of the Independent Community Bankers of America. Mr. Dennis A. Everson, who is the Senior Vice President of the First Dakota National Bank of Yankton, South Dakota, on behalf of the American Bankers Association, and Mr. Bert Ely of Ely & Company, who is an economist of fine reputation and who the committee is welcoming back.

    Since Mr. Torpey is from the First Congressional District of Iowa, I think we should begin with you and let me say, I know of no one in community banking that has a finer reputation than you do, sir, so we welcome you, sir.

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    Mr. TORPEY. Thank you very much, Mr. Chairman. As an Iowa banker let me first state my appreciation to you, Mr. Chairman, for your service as Chairman of this committee and the thoughtfulness that you have brought to the major credit-related issues.

    As you stated, I am President of the Community State Bank in West Branch, Iowa, and Chairman of the ICBA's lending committee. My $61 million bank is heavily involved in agriculture. Over the past 3 months, the ICBA has provided comments to FCA on three issues: Other financial institutions, national charters, and 100 percent loan participations. All three have the potential for significantly impacting rural credit markets, but only one in a positive manner. In April, FCA published an advance notice of proposed rulemaking on the other financial institutions program. The OFI program was enacted in an effort to allow commercial banks, credit unions and other types of private lenders to access the funding window of the Farm Credit System to make loans in their local markets. Improving this program could make it a useful tool for community banks and their customers as Congress intended.

    For example, it could help address the ongoing and growing liquidity needs rural ag bankers have. Deposits are simply not growing fast enough in rural areas for a number of reasons, and this trend will worsen over time. Even though the OFI authority has been in existence for many decades, it was last updated by Congress in 1980, and instead of a vibrant OFI program, there are only 24 existing OFIs today.

    We have three specific recommendations: First, that Congress would request FCA to immediately hold a stakeholders meeting of participating OFI users. Second, based on this meeting and OFI user comments, Congress and FCA should provide the OFI program necessary flexibility and authority. And third, in order to protect local credit markets, require that a substantial number of new OFIs be formed before allowing any consideration of national charters. Because national charters will result in mergers, consolidation and the loss of credit choice for farmers, more OFIs will be needed.
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    Turning now to the national charter issue. We share the concern expressed by a number of FCS associations that nationwide charters would basically allow a large aggressive lenders of the FCS to cannibalize the smaller associations. It will also siphon away customers of local commercial banks through predatory pricing practices. And there are no new safeguards in FCAs proposal to monitor these predatory pricing abuses. These local lenders will try to compete, but may not have the resources to bid for credits at below-market rates. Commercial bank regulators will frown on these below-market rate loans. Eventually left with only the high risk customers in their markets, local lenders may be forced to reduce farm lending in local farm market since they can't be viable serving only high risk customers. Farmers will end up with fewer credit choices, not more. Local area service plans are not sufficient to ensure long-term service to farmers. Soon, after several FCS consolidations, there will only be one local service area—the United States of America.

    Mr. Chairman, our written testimony goes into detail on information from USDA economists concluding that FCS has made very few guaranteed beginning farmer loans in the Midwest, and few such loans to socially disadvantaged farmers compared to commercial banks. For example, the report states that FCS made only three guaranteed loans to beginning farmers in Iowa, Nebraska and South Dakota since 1993. I can say in our bank, we have made four such loans in the last 2 years. This is simply unacceptable for a Government-sponsored enterprise.

    When FCS associations merge into large organizations, it means that in some regions, the delivery of credit to beginning farmers in a broad area will be determined by the policies of just one association. For example, one large FCS association covers the States of Nebraska, South Dakota and Iowa. With the new mergers, low-income farmers in many additional States will now also have fewer credit choices. This lack of service to high-risk borrowers exists despite statutory language encouraging FCS to make these types of loans. National charters will also lead to loss of local grassroots control, and new, larger FCS associations will now be able to have board members from anywhere in the Nation.
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    As you have talked about, the FCS booklet calls this geographic diversification. How are association boards with memberships spread across the Nation going to be able to adequately weigh in on various types of specialized Ag loans? And how will the nationally-chartered associations inspect the collateral on loans thousands of miles away? As one FCS association stated, safety and soundness will be compromised and this could trigger losses that would impact the remainder of System institutions that are under joint and several liability. This ultimately means another taxpayer bailout. Early in the 20th Century, the FCS was created and granted special GSE status and tax breaks, because Congress wanted to ensure that a GSE filled credit gaps that existed in rural America at that time.

    FCA and FCS have argued in recent years that the FCS should be modernized and allowed to evolve. But this reality is the social mission of the System and has become extremely muddied. Congress should remedy this. Do these new multi-billion-dollar associations really need their GSE benefits and tax breaks to compete with my $61 million community bank? In these modern times, even the smallest community bank fulfills a social obligation through a Community Reinvestment Act. But in practical terms, the largest multi-billion-dollar FCS association, which will grow larger with a national charter, I might add, have no mandated social obligation. Why don't we also modernize this aspect of the FCS's mission?

    Mr. Chairman, national charters will not serve low-income farmers or any new needy farmers. It is simply Government subsidized encroachment designed to allow larger FCS lenders to increase market share and consolidate the FCS. Rural communities will suffer as their tax bases erode. A 1997 USDA report on credit in rural America said, and I quote: ''Differences in taxation means that shifting lending activities away from lenders that pay higher taxes on net income and shifting it to FCA lenders creates a budget loss to Federal, State and local governments.''
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    Our recommendations to modernize the FCS is to include a social mandate, which would redirect a portion of the profits of the larger multi-billion-dollar FCS institutions to beginning and low-income farmers and struggling rural communities through grants. We should require a significant portion of FCS loan portfolios to consist of loans to beginning and low-income farmers.

    My written comments discuss the issues of 100 percent loan participations, and I have just two basic concerns there. FCS could form its own secondary market with much lower quality standards then is used in the existing secondary market. And in 1995, Congress rejected granting similar authorities. FCA can achieve true customer choice by simply allowing farmers to borrow from FCS institutions in States where the farmer has operations. Also, current participation authorities provide FCS institutions plenty of opportunities to diversify. We welcome further conversation with FCA to enhance the OFI program. Simply put, FCA should take care of past business first, requiring many new OFIs in place before allowing consideration of national charters ensures local rural credit markets and family farms are protected.

    Thank you.

    Chairman LEACH. Thank you very much, Dale.

    Mr. Everson.

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    Mr. EVERSON. Mr. Chairman, I am Dennis Everson, Senior Vice President of First Dakota National Bank in Yankton, South Dakota. I am testifying on behalf of the American Bankers Association. I am the past Chairman of the ABA's Agricultural and Rural Bankers Committee as well as past Chairman of the ABA's Task Force on 21st Century Agricultural Banking. During my agricultural lending career, I have worked with the USDA, the Farm Credit System, and most recently in the commercial banking industry.

    First Dakota National Bank is a $320 million community bank in southeastern South Dakota. Approximately 44 percent of our loan portfolio is in agricultural loans, and despite historically depressed commodity prices, the competition for good agricultural credit in our service area is very strong. Our bank competes with 29 commercial banks, five credit unions, three machinery manufacturers, three seed and fertilizer companies, and Farm Credit Services of America.

    The 1980's were very difficult times for farmers throughout the country. During that period, hundreds of banks failed as a result of the farm credit crisis. However, one of the most dramatic indications of just how bad things had gotten was the need for a $4 billion line of credit from the Federal Government to bail out the FCS. The FCS financial crisis was precipitated by unfortunate legislative and regulatory changes designed to reinvent a system that was playing an increasingly diminished role in the agricultural economy.

    There are three very important points to keep in mind when considering the national charter proposal. First, the FCS has assumed a diminished role in a market brimming with competitive providers for agricultural credit; second, commercial banks have more than filled the void left by the FCS; and third, the National Charter Initiative is reminiscent of the 1980's in that the System is, once again, desperately trying to reinvent itself, since its mission has been all but met by the private sector.
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    Since establishment of the FCS in 1916, the System institutions have always operated with clearly-defined chartered territories, have enjoyed beneficial Federal and State tax treatment, and have had access to lower cost lendable funds. Furthermore, the participation of farmer and rancher borrowers in management, control, and ownership of the System has always been central to its mission. By abandoning clearly defined territories and the principal of local ownership and control, the FCA would undermine essential and core principals of the System. As a result, the question becomes whether GSE status for the System is appropriate or required.

    National charters will for the first time have System institutions competing with each other. There appears to be no credible justification for sending a GSE on such a new and reckless course of internal competition. While FCA has denied that System institutions have engaged in any below-market pricing, we are very concerned that with national charters, System institutions will engage each other in a disastrous round of low-ball pricing that will undermine the safety and soundness of the entire System.

    We have great concerns about the negative impact national charters will have on small and beginning family farmers as System institutions seek larger, more profitable loans at the expense of these borrowers. FCA's national charter proposal will primarily or exclusively benefit large multi-State farm and ranch operations at a time when the System's record of lending to small family farms, beginning farmers and socially disadvantaged farmers is spotty. We believe that the access of small and beginning farm borrowers to FCS capital, if national charters are granted, will be further compromised.

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    The System failed in 1987 for two reasons: Aggressive expansion and lack of regulatory oversight. These safety and soundness concerns are equally significant under this initiative.

    The National Charter Initiative had its genesis, and will achieve the same result as the FCA's failed Customer Choice proposal. That 1998 proposal elicited hundreds of comment letters in opposition from System institutions and others fearful of the impact of unrestrained intra-system competition. However, FCA chose to ignore them and the process and charged ahead with its proposal to grant national charters with little or no Congressional or public comment.

    Indeed, FCA only reluctantly agreed to publish its booklet for public comment. However, FCA was careful to note that the booklet is not subject to a notice and comment requirement. Like dissent to customer choice, FCA never intended to seriously consider the hundreds of letters they received in opposition to national charters. FCA is supposed to be a bipartisan and independent agency of the Executive Branch. The stated mission of FCA is to ensure a safe and sound competitive system to finance agriculture and rural America as authorized by Congress. By ignoring Congress and the public's concerns, the FCA has ignored its fiduciary responsibility.

    In summary, the shift to national charters will translate into new safety and soundness risks. We believe that FCA has failed to adequately assess the potential for such problems and has failed to open an adequate dialogue with all stakeholders about this issue. Furthermore, FCS was created at a time when there were limited choices for credit for American agriculture. Today, my customers have nearly unlimited access to a wide variety of credit opportunities. The fact that these options exist raises the question of whether the mission of the FCS has been met and why the American pubic should remain liable for the reckless activities of a tax-advantaged GSE. Given their track record of unsafe and unsound lending in the past and the lack of enforcement on the part of their regulator, we urge Congress to stop this process before it is too late.
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    Thank you for your interest in this issue and I would be happy to answer any questions.

    Chairman LEACH. Thank you, Mr. Everson.

    Mr. Ely.


    Mr. ELY. Mr. Chairman, I am pleased to testify today on the Farm Credit Administration's National Charter Initiative. Appended to my statement is a paper I have written entitled ''Where is the Farm Credit System Going?'' and a report I wrote last year titled ''The Farm Credit System: Reckless Past, Doubtful Future.'' I request that this material be included in the record of this hearing.

    Chairman LEACH. Without objection, your material will be placed in the record. Without objection, full statements of the other witnesses as well as your own will be placed in the record, too. Please proceed.

    Mr. ELY. Thank you.

    While the American Bankers Association is a client of mine, my statements will reflect views I hold personally and quite strongly.
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    Mr. Chairman, I commend you for holding this hearing, for the FCA's National Charter Initiative is a train that is about to rush from the station and on to a weakened bridge that will quickly collapse into a deep chasm with catastrophic consequences. In the 10 years that I have been following the Farm Credit System, no FCA proposal has concerned me more than its National Charter Initiative.

    Hopefully, after this hearing, the FCA will take off its blinders, slam on the brakes, and put this initiative on hold until the next Congress has not only considered the future, if any, for the FCS, but also enacted the appropriate legislation. National charters should not be an element of the FCS's future.

    The numerous implications of national charters for the FCS, for agriculture, and for rural America are quite troubling. More specifically, national charters will accelerate consolidation within the FCS. From the end of 1984 to July 1, 1999, the FCS shrank from 845 largely local lending institutions to 187 increasingly regionalized lenders. As of last week the number of FCS lenders had shrunk further, to 159. Given the joint management of many production credit associations and Federal land credit associations, the actual number of FCS management teams today is just 117. Pending mergers will shrink that number further this year.

    Clearly, the FCS today is not the FCS of twenty years ago or even ten years ago. Once upon a time, the typical FCS institution served a relatively small area, often just a few counties, and was run by a board of directors of local farmer-borrowers. Increasingly though, FCS associations cover vast territories, in one case serving five States and have as much as $5 billion in assets.
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    Consequently, these organizations are run by professional managers distantly removed from the markets they serve. Instead of genuine cooperatives, they have become large, mutually-owned financial institutions with the attendant lack of stockholder accountability common to all large mutually owned organizations. Consolidation within the FCS is gravely changing its nature. National charters will worsen the situation in four regards.

    First, in a dramatic break with the FCS' 84-year history, national charters will pit FCS lenders against each other in the pursuit of loans outside of previously exclusive territories. Aggressive FCS lenders will use their taxpayer subsidized funding and tax exemptions which now exceed $1 billion annually, not only to compete even more aggressively against banks and other private sector lenders, but also against each other.

    For the first time, we will witness GSEs competing against each other at the retail level, for each FCS association is a GSE in its own right. Predatory FCS lenders will cut interest rates, take greater credit risks, and lure lending officers away from other FCS lenders with bigger paychecks in the hope of capturing their customers. Despite cries to the contrary, expansionist FCS institutions will not fill unmet credit need. Instead, they will be chasing after the most desirable agri-business customers. Therefore, no public purpose will be served by national charters for FCS lenders.

    Second, national charters will accelerate the pace of consolidation within the FCS. Smaller FCS lenders, specifically those with less than $100 million in assets, will be forced by loan cherry-picking by bigger, out-of-territory associations to merge into larger organizations. I can easily foresee less than 50, and perhaps as few as 20 FCS lenders within a few years, each competing aggressively outside of its assigned territory.
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    Third, bigger FCS institutions will increasingly focus their lending on larger farms and ranches as well as agri-businesses, the very enterprises which neither need nor deserve the $1 billion-plus financing subsidy the FCS now delivers to American agriculture. Simple economics will force the larger FCS lenders to trim their lending to small, beginning, young, minority, and women farmers and ranchers, the very individuals that these lenders should serve.

    Fortunately, unsubsidized commercial banks will be there to meet those credit needs. Finally, and perhaps most troubling, national charters will create the potential for another FCS-induced agricultural credit crisis and a second taxpayer bailout of the FCS. This potential will arise as aggressive FCS institutions overlend again on agricultural real estate, as occurred in the 1970's, inflating a bubble in farmland values that inevitably will collapse with tragic results for rural America.

    Many Members of this committee may remember in 1987 when Congress had to toss the FCS a $4 billion life ring. Just as the FCA in the 1970's could not prevent that bubble from erupting, a regulator who has become a cheerleader and a facilitator of the empire builders within the FCS is hardly equipped to rein in their appetites.

    In closing, I will quickly address the two other points. First, since I am not a lawyer, I cannot opine on whether the FCA has the statutory authority to issue national charters. But even if it did, it should not issue them until after Congress has explicitly considered their merits. Second, I encourage Members of the committee to read the comment letters the 16 FCS institutions opposed to national charters filed with the FCA. Included in my statement is a list of those institutions. These FCS insiders can attest far better than I can to the dangers and downsides posed by national charters.
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    Mr. Chairman, thank you for your time. I welcome your questions.

    Chairman LEACH. Well thank you very much, Bert. I appreciate this.

    Let me ask you, Mr. Torpey. If you were to make most of your farm loans in South Dakota in the area of Mr. Everson's bank, what would a regulator say? And if Mr. Everson were to make most of his farm loans in the West Branch, Iowa area, what would a regulator say to him?

    Mr. TORPEY. Our regulator, which would be the State of Iowa, would say that would be an illegal loan. We are not contiguous right next to the other State. You could go across the border then, but with us our regulator would frown upon that, and I am sure would criticize every loan we made there.

    Chairman LEACH. What about your regulator, Mr. Everson?

    Mr. EVERSON. We may be allowed to do it. The OCC would happen to be our regulator. We may be allowed to do it, but I must assure you that we would be under huge scrutiny, and very possibly could have those credits classified simply because they were out of our area.

    Chairman LEACH. Well, that is the proposal that the Farm Credit System is suggesting that they should do.
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    Let me turn to you, Mr. Torpey. As you know, sociologically, the greatest change in the State of Iowa, which you serve is the movement in the last decade in the farm area from small family farm livestock operations to huge—or to many, very large operations. In fact, in less than a decade, we have lost three-quarters of the farmers that raise hogs. This is a function largely of credit. And it looks to me as if the Farm Credit System is funding these operations. Is that your experience?

    Mr. TORPEY. In our immediate area it is. We have maybe four large confinements, but they are all individually owned by an individual farmer. Of the couple of large sow confinement operations, at least one is financed by the Farm Credit System.

    Chairman LEACH. And if you go to this national system, it seems to me self-evident that you will see a FCS entity in North Carolina where a lot of these places are located—or Missouri—be able to spread nationwide with greater ease. Does that seem rational to you?

    Mr. TORPEY. That would be my fear, yes.

    Chairman LEACH. So it strikes me that I have heard of no request for the young farmer, the starting farmer, the family farmer, to be able to get credit from out-of-State FCSs and that there is no desire of out-of-State FCSs to give this kind of credit.

    Mr. TORPEY. Right.
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    Chairman LEACH. And therefore, within agriculture, it appears that the only reason for this in terms of diversification is to serve the large entity. And outside of agriculture there is a huge desire of the FCS to serve more loans to areas that are defined as rural or small towns that are basically commercial.

    Mr. TORPEY. Yes.

    Chairman LEACH. And that what you are seeing here is going to be a transformation of a system into a much more commercially-oriented system and a system that will be designed to serve larger operators.

    Mr. TORPEY. In our area, that is what has happened. We have had, as they say, the cherry-picking of our excellent, excellent customers with high net worths. We have lost not, you know, tens of hundreds or anything, but we have lost 4 or 5 over the years here, over the last 4 or 5 years, who we would consider our gold-plated customers to Farm Credit System.

    Chairman LEACH. What that means is it is basically a loss of customer to Government subsidized credit, so it is a movement from the private sector to the public.

    Mr. Ely, let me ask you in terms of recommendation. And by the way, I appreciate the list of recommendations you made, Mr. Torpey.

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    Mr. TORPEY. Thank you.

    Chairman LEACH. Does it seem credible to you to think that the Treasury ought to be on the board of every GSE?

    Mr. ELY. I'm sorry?

    Chairman LEACH. That the Secretary of the Treasury or his designee should be on the board of every GSE?

    Mr. ELY. I think you get to a question that comes up with regard to all the GSEs in terms of how independent and strong is their regulatory oversight. That has obviously been an issue with the housing GSEs. My personal belief is that there should be a Treasury-based GSE regulator over all of the GSEs.

    The problem that we see with the FCA is a concern that always comes up with any regulatory agency, and that is a matter of agency capture. In my opinion, with the FCA we clearly have the expansion, as I call it, of the empire builders, who have effectively captured the FCA. They have been able to go off in the direction they have because they have captured the FCA. The only way you can have effective regulation of the GSEs is if there is some form of strong Treasury oversight so that there is more of a direct Executive Branch accountability and therefore, less likelihood of capture.

    Chairman LEACH. I appreciate that, and my own sense is because part of that this is a function of law making, but that there is no reason that the Treasury can't establish an interagency GSE advisory or oversight group; is that right?
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    Mr. ELY. Not only is that quite feasible, but Treasury at the staff level is doing more in terms of monitoring the GSEs. That is a matter of strengthening that function. But again, the more basic question is, is it really desirable to have the present structure of regulators who can become so easily captured? I wrote something on this about three years ago, suggesting several alternatives on how the regulation of all four of the major GSEs, the three housing GSEs and the Farm Credit Administration, could be consolidated into one agency that at least has some Treasury link.

    There are some variations on the theme as to how you can do that. What we see here with the national chartering proposal is illustrative of the problem we have of a regulator that has been captured and can go off on its own.

    I wonder if I could say one thing, going back to the issue of hog containment facilities. There have been some credit quality problems within the Farm Credit System in the last few years, specifically through Cobank's lending to cooperatives that have been running hog containment facilities. Your concern about those facilities reflects some specific credit quality problems for the System in recent years.

    Chairman LEACH. Let me say my concerns go a little larger than that, and what I mean by that is my concerns are not all credit quality. You can have high credit quality that is not necessarily in the national interest, and certainly not in the national interest to federally subsidize.

    Mr. ELY. I would fully agree with you on that point. I couldn't differ with you at all on that.
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    Chairman LEACH. One of the great ironies of this is, the United States Federal Government, through the Farm Credit System, has federally-subsidized consolidation of ownership in agriculture and the movement toward larger farms and larger hog confinement. And with this proposal that will be accentuated, even though the loans themselves might be credit quality, it is not something the United States Government should be in the business of doing. And the fact of the matter is that concentration is a function of credit availability. And the thought that a small Iowa hog producer should be competed against by Government credit just strikes me as an umbrage of significant dimension.

    Mr. ELY. Mr. Chairman, if I could add to that. What is even worse is the fact that the real estate lenders within the Farm Credit System, the banks themselves, as well as the Federal land credit associations, have the best tax advantage of any GSE, because they are not subject to Federal or State corporate income tax. They, of course, can borrow as a GSE. I estimated that their total subsidy is in the range of 175 to 200 basis points per dollar lent. We have a maximum subsidy going to very large borrowers. If we allow national chartering, that is just going to accelerate and accentuate that problem.

    Chairman LEACH. Thank you.

    Mr. Bereuter.

    Mr. BEREUTER. Thank you, Mr. Chairman.

    I regret missing your testimony, but I have been trying to go over it. We are in recess in the other committee, Mr. Chairman, until 1:00.
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    Mr. Everson, in particular, a welcome to you. Your institution is only a bridge away from my constituents in my district, and undoubtedly you serve many of them. And by the way, in the last authorization bill, there is $1 million to start the planning process for replacement of that very strange bridge that connects our States.

    Mr. EVERSON. Thank you.

    Mr. BEREUTER. Mr. Ely, I think your appearance here is very interesting. You may have heard my first question to Chairman Reyna before. It is, I see, some parallels to mistakes that were made in the savings and loan industry when they took new authority outside their area of competence, made loans across the countryside in areas for which they had no familiarity, and the result was disastrous for institutions and the American taxpayer, and I wonder if you care to comment on the fact that by this nationalization, we potentially are having institutions that are assuming financial commodity and other kinds of risk with which they are not familiar.

    Mr. ELY. First of all, the S&Ls represent a very good parallel. That is exactly what the problem is going to be, not only through national chartering, but also, as Mr. Torpey was talking about, the 100 percent loan participation pending regulation, which troubles me very much, because in a way that is a national chartering by another name. My greatest concern is that we are going to see the aggressive lenders within the Farm Credit System parachuting into what they think are good markets, but they are very different markets, because agriculture is quite varied across the country, not only in terms of the crops grown, but local markets, soil conditions, weather conditions, and so forth. What some of these lenders may do is try to hire lending officers away from association in that area.
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    I might add that that is one of the criticisms that is offered by those FCS associations that are opposed to national charters. And in so doing, they will hire what they think are good people, but those lenders, in fact, may make mistakes. But the folks back home in headquarters aren't going to know how good the loans are. They're going to be relying on someone they have hired, or maybe with an organization that is acting as a loan originator. There are bound to be mistakes that will create credit quality problems.

    Mr. BEREUTER. There are so many risks and so many uncertainties in agricultural lending. It is just amazing that we have as many institutions that are involved in it as are the case and is the case. And to think that we are asking people who have no particular expertise in a region, to have a better record, or a similar record, strikes me as strange and doubtful wisdom.

    Now, Mr. Everson, on the other hand, in his testimony, presents a contrast which is also equally troubling. He says the FCA fails to establish a case of how national charters will alleviate the System's concentration in lending to a specific commodity. For example, a System institution in Ohio that lends to large hog operations will almost certainly focus on hog operations in Iowa and North Carolina. Instead of more diversity in commodity lending, which is one of the things that supposedly stands in favor of nationalization, he goes on to say, ''we believe that the result will be a continued focus on the same commodity in other areas and increased concentration in a single commodity loan risk.'' Now, if that is the approach that they take instead, that is equally troubling.

    Mr. Torpey in his testimony, I understand you did actually read this or present it orally, you point out that according to the report that you referred to related to FCS guaranteed beginning farmer loans in the Midwest States, that the FCS made only three guaranteed loans to beginning farmers in Iowa, Nebraska and South Dakota since 1993. And since 1993, FCS has made no guaranteed loans to socially-disadvantaged farmers in Ohio, Indiana, Iowa, Illinois, Nebraska, South Dakota, Wyoming, Utah and Pennsylvania. Commercial banks were the largest supplier of guaranteed loans to targeted groups.
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    Ms. Waters brought up this concern. Now you two gentlemen who are bankers are subject to the CRA, the Community Reinvestment Act?

    Mr. TORPEY. That is right.

    Mr. BEREUTER. It does not cover loans to beginning farmers. But I would think it would be interesting to consider whether or not we need a CRA that applies to the Farm Credit System with respect to startup farmers or farmers that are socially disadvantaged. Maybe we ought to have a test. I have been among the biggest critics of the CRA as it applies to most of my small community banks, but perhaps we need to move ahead. Interesting concept. What do you think of that?

    Mr. TORPEY. I guess by our charter in our bank, we do not pay much attention to CRA, because just by what we do on a daily basis, we take care of that particular requirement.

    Mr. BEREUTER. I assume if you don't, you are out of business, if you do not serve your community.

    Mr. TORPEY. That is right. One thing that I would like to bring up and follow up along the same line, would be that I would suggest to the FCS and FCA that maybe they do something similar to what the Federal Housing and Finance Board or the Federal Home Loan Banks do with the affordable housing programs, where they set aside 10 percent of their income and give grants for housing. Maybe that is something that we ought to be looking at here to set aside some of the income from these Farm Credit System associations and use it for beginning farmers. I tell you there is a real need out there for that particular thing.
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    Mr. BEREUTER. That is a very interesting idea. I think this has been a legislatively productive hearing for the next Congress. I also noted, someone here made the comment, my staff tells me, about the fact that the Federal Home Loan Bank Board has not abandoned their regional approach, and it is interesting that we are about to see the FCA abandon their regional approach.

    Mr. ELY. What is important in that regard is the retail level. The Federal Home Loan Banks are still wholesale lenders to financial institutions. With the FCS, we are talking about GSEs going out to compete at the retail level. That is going to be a dramatic change from the past.

    Mr. TORPEY. I might add concerning the Federal Home Loan Banks, it has been discussed, but it hasn't gone any further than that, because we want to continue to have control in our districts over what goes on. And for instance, in the Des Moines district, we have five States. It is rural, it is agricultural, it is completely different from the New York bank or the San Francisco or Dallas bank, so we think there is a real need to keep those charters local.

    Mr. BEREUTER. I have one more question. It is for you Mr. Torpey, and that is, your statement that Congress should not allow FCS to form its own secondary market through a regulatory approach when it has already denied a legislative request to achieve the same ends. Could you explain to me what you mean by that?

    Mr. TORPEY. Well, I think it was 1995 that this was proposed to Congress. And it was denied at that time.
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    Mr. BEREUTER. How is it that you see this as an attempt to form its own secondary market through a regulatory approach?

    Mr. TORPEY. I could get back to you on that in more detail. Basically, after this authority, they would only need securitization authorities to have their own secondary market.

    Mr. BEREUTER. You did talk about FCA's 100 percent loan participation proposal. I gather that relates directly to that.

    Mr. TORPEY. Yes.

    Mr. EVERSON. If I might, Congressman. My opinion would be this business of 100 percent loan participation, I think, is what this was in reference to, that is indeed, if you look at it to at least an indirect secondary market, if approved in conjunction with the national charters, you have, indeed, I think, circumvented what I think was tried to be accomplished some 5 years ago congressionally and failed.

    Chairman LEACH. Mr. Ely, would you comment on that, too?

    Mr. ELY. I have that concern about the 100 percent loan participation rule, that that could facilitate the trading of loans, once they are purchased from the outside. Then there could be a secondary market for those loans within the FCS. There is also something else about the 100 percent loan participation rule that is very troubling and that is that the ultimate borrower will not know that his or her loan has been sold to the Farm Credit System Association; that instead, the originator is going to service the loan and handle all that is related to that loan for the life of it.
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    What this means is the borrower won't become a member of the Farm Credit System Association that is holding the loan or that has ultimately made the loan. This will totally undermine the whole notion of the Farm Credit System as a cooperative.

    The question I raise is when is a cooperative no longer a cooperative? If some small FCS association transforms itself over a period of time so that 80 percent of its loans outstanding by dollar amount are loans that it has bought from non-FCS originators, and those borrowers are not members of the association, then what do we really have there? The scope of the hearing is to focus on national chartering, but there are some very troubling implications of the 100 percent loan participation regulation that are very closely related to this issue that also, again, raise some very troubling questions about the FCS and how it is trying to transform itself.

    Mr. BEREUTER. To answer your rhetorical question, I think what you have is part of the removal of the justification for the special tax advantage that was given to the cooperative efforts with members' participation.

    Mr. ELY. You are exactly right. It is an interesting tax question that I certainly can't answer, but again, if a large portion of an association's loans are being made to borrowers who are not members of that association, then it is not really a cooperative.

    Mr. BEREUTER. It is doubtful.

    Mr. Chairman, I want to thank the witnesses in conclusion and thank you for your initiative. And tell that you that I will be happy to cooperate with you in any efforts that you think should be forthcoming from these hearings. Thank you.
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    Chairman LEACH. Well, thank you very much, Doug.

    I would like to raise just one aspect of this last dialogue, which I think is very impressive on the nature of the cooperative. We have a system designed to serve family farmers. And we have kind of a cooperative structure of decisionmaking based on local control, which will be turned upside down in this. But also, the borrowers could become very different if an agri-business comes in claiming access to the Government credit markets. Is that a cooperative arrangement? There is a clear desire of the FCS to serve more and more commercial entities, and that is simply a use of access to a GSE that is not of a cooperative nature.

    And so what you have here is basically a national charter and its attendant rulemaking driving a stake into the heart of the American cooperative movement. And the United States Congress has been very generous to cooperatives and sometimes to the disadvantage of the private sector finance system. But should that generosity then also apply to cooperatives acting in a non-cooperative way. A very real question. And I think philosophically the Farm Credit System is going to have to get its house in order before it takes these steps.

    Anyway, may I ask a question? We have a sparse audience. Is there anyone here from the Farm Credit System at the moment? Thank you. Is there anyone here from the Department of the Treasury? Well, I hope that these messages go back. And I would say in conclusion, there has to be accountability for this kind of decisionmaking, and in my opening statement, I used a very strong term and I am going to repeat it, I believe the Department of the Treasury has been AWOL in its responsibilities for protecting the borrowing system and in coordinating Executive Branch policy in finance when it allows, without any leadership, decisions of this nature to occur.
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    And I recognize the Treasury is not a part of the formal decisionmaking that relates to the Farm Credit System technically, but I think we need Executive Branch leadership. And one of the frustrations that I as a Chairman of the committee have, and that I have to respond to my good friends from Nebraska, is that we have secondary jurisdiction over the Farm Credit System. And that is a very frustrating aspect of this circumstance. But I would simply conclude by saying that in one sense, this is a Farm Credit System issue, and in another sense it is basically a GSE issue.

    And Government-sponsored enterprises, each individually, have a natural tendency to want to expand their powers and their markets, and the great question as a society that we just have to ask is, is it in the national interest to expand governmentally subsidized and directed credit? Or in this premarket society with the most sophisticated and competitive financial markets in the world, do we want to be more market-oriented? And I am hard-pressed not to come down on this kind of issue definitively on the pro-market side and against, basically, an expansion of activity in a way that is absolutely incalculable in what its effect is going to be.

    And to date, some of these effects have more special consequences than I think the public has focussed on. I will end with your comment.

    Mr. ELY. Just one comment that I think is very important that came up with regard to the benefits of diversification, which the Farm Credit Administration claims. Mr. Baer, in his statement, had a very important observation on this point that needs to be kept in mind, if I could read it. It is one sentence. ''We do not believe that diversification at the association level would provide much, if any, diversification gains to the System as a whole.'' This lack of increased diversification results from the joint and several liability that exists within the FCS. That is just one more reason why this is a very hollow argument that the FCS has offered in defense of its national chartering proposal.
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    Chairman LEACH. Well, thank you very much. I want to thank all three panelists. I am very appreciative of your testimony. The hearing is adjourned.

    [Whereupon, at 12:48 p.m., the hearing was adjourned.]