[Senate Hearing 107-188]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 107-188

            FCA'S PROPOSED REGULATIONS ON NATIONAL CHARTERS

=======================================================================

                                HEARING

                               before the

                       COMMITTEE ON AGRICULTURE,
                        NUTRITION, AND FORESTRY

                          UNITED STATES SENATE


                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION


                               __________

                           FEBRUARY 26, 2001

                               __________

                       Printed for the use of the
           Committee on Agriculture, Nutrition, and Forestry


  Available via the World Wide Web: http://www.senate.gov~agriculture

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           COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY



                  RICHARD G. LUGAR, Indiana, Chairman

JESSE HELMS, North Carolina          TOM HARKIN, Iowa
THAD COCHRAN, Mississippi            PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            KENT CONRAD, North Dakota
PAT ROBERTS, Kansas                  THOMAS A. DASCHLE, South Dakota
PETER G. FITZGERALD, Illinois        MAX BAUCUS, Montana
CHARLES E. GRASSLEY, Iowa            J. ROBERT KERREY, Nebraska
LARRY E. CRAIG, Idaho                TIM JOHNSON, South Dakota
RICK SANTORUM, Pennsylvania          BLANCHE L. LINCOLN, Arkansas
GORDON SMITH, Oregon                 ZELL MILLIER, Georgia

                       Keith Luse, Staff Director

                    David L. Johnson, Chief Counsel

                      Robert E. Sturm, Chief Clerk

            Mark Halverson, Staff Director for the Minority

                                  (ii)

  
                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing:

Monday, February 26, 2001, FCA's Proposed Regualtions on National 
  Charters.......................................................     1

Appendix:
Monday, February 26, 2001........................................    45
Document(s) submitted for the record:
Monday, February 26, 2001........................................   107

                              ----------                              

                       Monday, February 26, 2001
                    STATEMENTS PRESENTED BY SENATORS

Lugar, Hon. Richard G., a U.S. Senator from Indiana, Chairman, 
  Committee on Agriculture, Nutrition, and Forestry..............     1
Thomas, Hon. Craig, a U.S. Senator from Wyoming..................     6
Hutchinson, Hon. Tim, a U.S. Senator from Texas..................     8
Crapo, Hon. Mike, a U.S. Senator from Indiana....................    10
                              ----------                              

                               WITNESSES
                               (PANEL I)

The Honorable Jim Leach, a Representative from Iowa..............     2

                               (PANEL II)

Reyna, Hon. Michael, Chairman of the Farm Credit Administration, 
  accompanied by: Ann Jorgensen, FCA Board Member................    13

                              (PANEL III)

Barry, Dr. Peter, Professor of Agricultural Finance, University 
  of Illinois, Urbana, Illinois..................................    37
Burns, Phillip, Chairman, Farmers and Merchants National Bank 
  West Point, Nebraska...........................................    30
Leighty, Dale, President, First National Bank of Las Animas, Las 
  Animas, Colorado...............................................    32
Webster, Jack, President and CEO, Farm Credit Services of 
  America, Omaha, Nebraska.......................................    28
Williams, Bobby D., Grain Farmer and Board Member, Heritage Land 
  Bank, Tyler, Texas.............................................    25
                              ----------                              

                                APPENDIX

Prepared Statements:
    Lugar, Hon. Richard G........................................    46
    Leach, Hon. James A..........................................    47
    Barry, Peter J...............................................    97
    Burns, Philip................................................    76
    Jorgensen, Ann...............................................    66
    Leighty, Dale................................................    84
    Reyna, Michael M.............................................    50
    Webster, Jack................................................    71
    Williams, Bobby..............................................    68
Document(s) submitted for the record:
    Testimony of Ed Hester, Chairman of the Board, Federal Land 
      Bank Association of North Mississippi, FLCA................   108
    Testimony on Behalf of AgFirst Farm Credit Bank..............   110
    Letter submitted by Robert A. Carson, Marks, MS..............   111
    Letter submitted by Jack A. Anderson, St. Johns MI...........   113
    Letter submitted by Donald E. Ludy, Director, Valley AgCredit   114
    Letter submitted by James D. Kirk, President and CEO, 
      AgAmerica, FCB.............................................   115
    Letter submitted by Carl Higbea, member of the Board of 
      Directors of AGRIBANK FCB..................................   117
    Letter submitted by Allaire P. Palmer, board member, Farm 
      Credit of Maine, ACA.......................................   118
    Letter submitted by Daniel J. Corey, board member, Farm 
      Credit of Maine, ACA.......................................   119
    Letter submitted by J. Allen Akkerman, President, Valley 
      AgCredit...................................................   120
    Letter submitted by Henry E. McPherson, Director, Farm Credit 
      of Maine, ACA..............................................   122
    Letter submitted by Raymond Parks, Chairman of the Board of 
      Directors, Agricultural Credit Association, Idaho..........   123
    Letter submitted by R.K. Laird, Chairman, and James F. 
      Martin, Jr., Vice Chairman, First South Agricultural Credit 
      Association................................................   124
    Letter submitted by Jeremy Oliver, Sr. VP-Corporate Finance & 
      Information Services, AGCountry, Farm Credit Services......   126
    Letter submitted by Raymond J. Nowak, President and CEO, Farm 
      Credit of Maine, ACA.......................................   127
    Letter submitted by Robert M. Tetrault, Chairman of the Board 
      of Directors, Farm Credit of Maine, ACA....................   128
    Letter submitted by Donnie Winters, President and CEO, Farm 
      Credit Services, Louisville, Kentucky......................   129
    Letter submitted by Daryl Oldvader, Chief Executive Officer, 
      Farm Credit Services of Western Missouri...................   130
    Letter submitted by Jim McKissick, Vice President of Brand 
      Marketing & Communications, AgStar Financial Services, ACA.   131
    Letter submitted by Don E. Wenell, CEO, AgCountry, Farm 
      Credit Services............................................   132

 
            FCA'S PROPOSED REGULATIONS ON NATIONAL CHARTERS

                              ----------                              


                       MONDAY, FEBRUARY 26, 2001

                                        U.S. Senate
           Committee on Agriculture, Nutrition and Forestry
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:30 a.m. in 
room 328, Russell Senate Office Building, Hon. Richard G. Lugar 
(Chairman of the Committee) presiding.

OPENING STATEMENT OF HON. RICHARD G. LUGAR, A U.S. SENATOR FROM 
  INDIANA, CHAIRMAN, COMMITTEE ON AGRICULTURE, NUTRITION, AND 
                            FORESTRY

    Present: Senators Lugar, Thomas, Hutchinson, and Senator 
Crapo.
    The Chairman. This meeting of the Senate Agriculture 
Committee is called to order.
    The hearing today will hear testimony concerning the Farm 
Credit Administration's proposed rule on National Charters. 
This regulation outlines the procedures for allowing Farm 
Credit System institutions to conduct agricultural lending 
outside their traditional geographic boundaries.
    For those of us with oversight responsibilities over the 
Farm Credit System, today's hearing is a good indication that 
the system is healthy and competitive. During the mid-1980s, 
when the Farm Credit System was suffering financial 
difficulties, this Committee worked to help put together a 
legislative package that allowed the Farm Credit System to 
weather those challenges. As a result of those efforts, the 
system finds itself on sound fiscal ground.
    Although we celebrate the system's convalescence, today's 
purpose is to explore whether the Farm Credit Administration 
has gone beyond its grant of authority through its proposal on 
National Charters. The Farm Credit Administration has wisely 
put this proposed rule out for a 30-day comment period, but 
there are several public policy questions raised by this action 
that deserve our committee's review and scrutiny; and thus, 
this hearing.
    First and foremost, does the Farm Credit Administration 
have the statutory authority to provide its associations with 
National Charters? I will be interested, as will all Senators, 
in the various views of witnesses on this topic.
    Even if the Farm Credit Administration has the legal 
authority, does the granting of National Charters advance a 
valid public policy, as well as the Agency's mission statement? 
The Farm Credit System and its regional lending limitations 
have been in existence for over three quarters of a century, 
providing a dependable and competitive source of credit for 
agriculture. Today's hearing will explore whether National 
Charters will strengthen competition in agricultural lending, 
or whether it will lead to greater consolidation among Farm 
Credit institutions and community banks.
    Our first witness will be the Honorable Jim Leach of Iowa, 
who as chairman of the House Banking Committee, thoughtfully 
explored through a hearing on this issue last year the issues 
that we are discussing today. Our second panel consists of the 
Honorable Michael Reyna, Chairman of the Farm Credit 
Administration and the Honorable Ann Jorgensen, Board Member of 
the Farm Credit Administration. Our third panel is made up of 
representatives from the Farm Credit System, the banking 
industry and the academic community.
    We look forward to the individual testimony provided by 
these witnesses, and our questioning of them. It is indeed a 
great pleasure to have Jim Leach before the Committee. He is a 
dear friend and a very wonderful person to work with in the 
Congress. We thank you for starting us out this morning.
    [The prepared statement of Chairman Lugar can be found in 
the appendix on page 46.]
    Jim.

    STATEMENT OF HON. JIM LEACH, A REPRESENTATIVE FROM IOWA

    Mr. Leach. Thank you, Chairman Lugar, and I'm pleased to be 
with my good friend, Mr. Thomas, as well.
    I don't have a formal statement, but I have some notes I'd 
like to go over with you. I would say, Mr. Chairman, that I'm 
in my 25th year in the U.S. Congress, I've testified before the 
U.S. Senate less than half a dozen times. I consider this issue 
that you are addressing today of seminal significance, and that 
is why I requested to come and speak before you.
    And I must tell you, there are very few issues that I feel 
stronger about. This proposal to allow the Farm Credit System, 
to have National Charters, and to in effect decentralize 
decision making within the GSA community, has major 
philosophical and market implications. It in effect will 
expand, and I want this statistic understood, 30-fold the 
number of Government-sponsored enterprises in the American 
economy. That is the meaning of National Charters for 
decentralized Farm Credit System entities.
    Each of these new Government-sponsored enterprises will 
have power greater than Fannie Mae and Freddie Mac. Each will 
be empowered at their own volition by a captive board, which 
has been proven by this approach to have the power to authorize 
credit, not just for farmers, which is what the Farm Credit 
System was established to serve. And it was established to 
serve farmers under the assumption, which was probably valid at 
the time, that credit availability in the farm economy was very 
weak.
    It will be allowed to make economic development loans, 
business loans, car loans, housing loans in all likelihood. You 
don't know where the limit will be because each of these will 
have National Charters.
    If you look at the market implications, there will be 
cherry picking and there will be predatory financing. There's a 
possibility that commercial interests will capture these 
institutions. And let me give an example. Let us say you're a 
major company that may make agricultural equipment. Why 
wouldn't you go to the nearby Farm Credit System entity and 
say, look, for 1/16th of a percent, you do all of our credit 
financing henceforth. Why should that big company need to go to 
the private capital markets, when it can go to the U.S. 
Government, in effect, for financing?
    If we look at public implications, you'll have Treasury 
management of borrowing absolutely thrown topsy-turvy. Because 
after all, what GSEs have is what might be defined under a 
constitutional term in an analogous way as a letter of mark on 
the capital markets. That is, these are financial entities that 
have the power of the U.S. Government given to them to reach 
into the capital markets.
    No one in this whole process has indicated that there is a 
need. Is there a lack of credit for business loans in America? 
Is there a lack of credit for real estate loans in America? 
Where is the lack of credit? We have the freest capital markets 
in the history of the world, and yet, this entity is coming and 
saying, we should socialize credit to a greater extent.
    Now, there's this theoretical thought that what a National 
Charter means may be simply to allow a bigger Farm Credit 
System entity in one State to give loans for agriculture in 
another State. But I will tell you, the issue isn't whether an 
Iowa Farm Credit System entity wants to compete with a New York 
Farm Credit System entity for a Nebraska farm loan. First, 
there is zero need for that, there is absolutely no proven 
need. And beyond that, in the history of real estate credits, 
non-local decision making has always been a prescription for 
disaster. It has never at any time been anything other than 
that.
    To the degree that one can say maybe there is a place 
somewhere that doesn't have adequate credit, which I don't 
believe, because a rural Farm Credit System entity can draw on 
the capital markets, just as a larger one tied to a larger 
State. But you can share credit between them if you have to.
    What is at issue here is new activities for which no one 
has shown need or demand, other than the Farm Credit System 
managers that have come to a captive board. Let me talk a 
little bit about captive boards. Several years ago, a rule was 
put out for this, and it failed to get any support.
    Last year, the board put out a booklet as a way around 
formal rulemaking. We submitted this booklet to the General 
Accounting Office, and asked whether or not it conformed with 
United States law. The General Accounting Office came back and 
said it did not.
    In other words, and I want to be very careful in my words 
here, this board attempted an illegal end-run of the U.S. 
Congress and the Executive Branch, which did not support their 
efforts. I want to repeat as carefully as I can, an illegal 
end-run.
    Now, because it was forced by the General Accounting Office 
ruling to come back in a formal way, and you were so right in 
your opening statement to say, does it have the legal authority 
in a rule, or is this a process, it has come back in the most 
unseemly manner at a time of Administration transition. And as 
you know, and Mr. Thomas knows, and I thank the gentleman from 
Arkansas for coming, the new Bush Administration has put under 
review late Clinton Administration rulemaking. And then the 
Administration requested that people go a little bit slow on 
new rulemaking until it gets its time and place.
    But what we have here is not late Clinton Administration 
rulemaking which is the concern of many in the Republican 
party. We have a board of Clinton appointees who have made a 
rule in this Administration that in effect is to be put in 
place in an unseemly 30-day comment period before people have 
had a chance to think through what is the right philosophy and 
the right policy.
    All over the world, we are telling Governments that they 
ought to have market-oriented reforms. This runaway Government 
agency, and I stress this, is proposing massive socialization 
of credit in the greatest free market economy in the world, at 
the very same time we're saying to other countries that they 
ought to go to more market reforms.
    Finally, let me just say, so that there's an understanding 
by perspective, as the former chairman of a committee of some 
jurisdiction over the financial industry, I've objected to a 
number of initiatives in the Office of the Comptroller of the 
Currency, I've objected to a number of policies of Freddie Mac, 
of Farmer Mac, that have been aimed at expanding, I believe, 
outside the judgment of the markets, as well as the law.
    But this is the single greatest act of administrative 
arrogance I have ever seen. The issue isn't what's good for the 
Farm Credit System. As a system, all systems want greater 
power. The issue is what's good for the American economy, and 
whether you want to have a market system or whether you want to 
have socialized credit. And what we have here is a system 
generated proposal, a captive Federal regulatory agency, 
proposing to massively change the nature of rural finance, 
under the assumption that America's commercial banks, America's 
savings and loans, America's credit unions, America's insurance 
companies, America's financial companies and real estate and a 
whole host of other companies, do not have the capacity to 
serve our market economy.
    I think it is preposterous. I think it is philosophically 
out of step. And I believe that it is an attempt to usurp the 
jurisdiction of the U.S. Congress by a very small numbered 
board, as well as thumb the nose at the Executive Branch. And I 
believe that this board proposal should be absolutely rejected.
    And I apologize for being as unbalanced as I have in this 
presentation, because I am one who thinks the Farm Credit 
System has served the farm economy well over the years. But to 
the degree it moves outside service to the U.S. farmer, I think 
it's going to lose an awful lot of support in the farm 
community. And to the degree it, has the implication of 
consolidating finance, I think will be moving in a less 
competitive way in the American financial system.
    And finally, I would just stress again, the issue here is 
whether or not there's a case for socializing credit to a 
greater extent than it's already occurred.
    I thank you all.
    [The prepared statement of Mr. Leach can be found in the 
appendix on page 47.]
    The Chairman. Well, thank you very much, Mr. Leach.
    Let me just ask the question I raised in my opening 
comments, and you acknowledged that---- does the Farm Credit 
Administration have the statutory authority to provide its 
associations with National Charters? Will you state your view 
on that question?
    Mr. Leach. It's a close call. Clearly, the booklet approach 
that it proposed last fall was defined to be in violation of 
two laws of the U.S. Congress. To me, it's inconceivable that a 
board would think through rulemaking it would have the power to 
change the entire mission of the Farm Credit System. And I 
believe it should happen by law itself.
    I will tell you that in a court of law, there is a general 
deference to Executive Branch Agencies under the Administrative 
Procedures Act. So I cannot define how a court would rule.
    I would say you would be confronted with a very unique 
situation in a court setting, however, because this would be 
one of, in fact the only instance I know of, where the Court 
would be caught in a little bit of a bind, where it is, the 
general administrative law precedent is that courts give 
deference to administrative agencies unless there is a 
capriciousness that's proved on the other side.
    But in this case, you would have in all likelihood the 
Executive Branch itself against the Executive Branch Agency. 
And so how a court would rule in that setting becomes much more 
difficult. And I can't predict that. All I can say is that I 
consider this to be thoroughly unseemly, and I would think 
you'd need an act of Congress to make this abrupt change.
    I would only say that because the Agency will come and say, 
we just have these small steps in mind, well, small steps lead 
to other steps, and this becomes the most uncontrolled process 
imaginable. The history of GSEs is a desire for expanded power. 
All GSEs try to spread their wings.
    So one of the great questions is, do you nip this type of 
thing in the bud or do you have an inevitability of more power 
through the socialized credit mechanism of GSEs.
    The Chairman. My second question follows whether or not 
there is statutory authority, is it a good idea in terms of 
extension of Farm Credit? The testimony often in the past, by 
that I mean in the last two decades, has been on occasion that 
Farm Credit was deficient in many agricultural regions of the 
country. You come from a district in Iowa which obviously has 
Farm Credit needs, and we have Senators present today who will 
testify from their standpoint.
    Mr. Leach. I have never in my State found any deficiency. 
In fact, if you talk to competitors of the Farm Credit System, 
you'll see that they are everywhere I know of in America. There 
are very aggressive lending policies by the Farm Credit System 
towards farmers. I know of no case where it isn't. And if one 
can show me cases where the Farm Credit System is not, I would 
be amazed.
    Beyond that, under its current authorities, because it has 
a claim on the U.S. Government borrowing system. There is no 
Farm Credit System that is denied credit availability. For 
example, if you take a commercial bank setting, a commercial 
bank has to rely upon getting deposits, usually from a local 
base. And sometimes these deposits are hard to come by, and one 
might argue a commercial bank might have a hard time getting 
deposits at one time or another.
    But that argument never applies to the Farm Credit System. 
Across the country, they have an ability to draw upon a 
national pool. And so, maybe someone can find a Farm Credit 
System entity that chooses not to be aggressive. But I'm hard 
pressed to know of it.
    The Chairman. During Congressman Leach's testimony, we've 
been joined by two additional Senators. Senator Thomas was here 
at the beginning, and I postponed any additional statements at 
that point until we had sort of an accumulation, if possible. 
But let me ask now, Senator Thomas, if you have an opening 
comment and/or questions of the witnesses. I will ask that of 
each of the other two colleagues.

  STATEMENT OF HON. CRAIG THOMAS, A U.S. SENATOR FROM WYOMING

    Senator Thomas. Thank you very much, Mr. Chairman. You've 
kind of got the freshman class here on your committee today, 
which is welcome.
    I don't have a statement, but I am, although I've been 
involved, certainly aware of the Farm Credit activity in 
Wyoming, I've not been involved in the background of it. I 
understand what you're saying is, where it appears that this 
was simply an effort to expand the lending field for any 
particular, you're saying it will change the role of these 
lender?
    Mr. Leach. Well, there can be only one purpose of 
this,Senator, and that is to make new types of lending, that 
is, to expand the powers of the Farm Credit System. And that 
means business loans, it means car loans, it means any kind of 
loan you want to visualize. And the case will be made that the 
jurisdiction of the Farm Credit System is not farms, it's the 
rural community.
    And that's really good for the Farm Credit System manager. 
But I would say, just as strongly as I can note that this is a 
grant of power greater than Fannie Mae or Freddie Mac. And it 
can be done on a national basis.
    One of the things that will occur here, and one of the 
arguments, by the way, is it will make it easier for the Farm 
Credit System to follow their big national customers. And let's 
take my State as an example. The only argument that I've ever 
heard of this is that it means that a large hog producer, and 
let's abstractly say in North Carolina, where the center of hog 
production is, will be able to take a captive Farm Credit 
System entity and make its loans more easily nationwide.
    Well, if you think about the Farm Credit System, in its 
original Charter it was to serve individual farmers of modest 
means. And I believe this inevitably is a big agribusiness 
approach that will end up pushing what in effect are bigger and 
bigger entities that become conglomerates, whether it be in 
hogs, or let me just give another example. As I read this 
potential intent, does this mean that a Cargill, a John Deere, 
two wonderful American companies, can suddenly go to the Farm 
Credit System for all their credit needs? And what you've done 
is socialize credit for anyone that claims an agribusiness, for 
IBP, for Tysons Foods.
    These are great American companies, but do they need to go 
to the U.S. Government for their credit? And I would tell you, 
these companies probably don't even know about this proposal.
    But once it becomes law, I just ask, if any of you are 
treasurers of a major agribusiness company, isn't your first 
thought going to be that you're going to go to the closest FCS 
entity, and actually the smaller the better, because it doesn't 
matter how big or small a Farm Credit System entity is, because 
it has the power to tap into the Government credit market. And 
you will have a case, and they will say, absolutely, we'll 
provide you all the credit you want.
    Well, again, you talk about a concentration. I have a great 
deal of respect for all of these entities. But does that 
disadvantage the local elevator? Or now, does the local 
elevator have to go to the Farm Credit System? And then, what 
is the role of a community bank?
    The Chairman. Really, it doesn't specifically change their 
mission, but you think it will expand it, just by the nature of 
the----
    Mr. Leach. Oh, it totally changes their mission. It makes 
them a service of business, it makes it a service of all of the 
credit circumstances in maybe towns under 50,000, maybe States 
that are principally agricultural. Who knows.
    The Chairman. Well, I'd be very involved over here, in 
trying to, with our FAIR bill and so on, trying to ensure that 
the Government is not expanding beyond into areas that could be 
reasonably done in the private sector.
    It's my understanding that the local units, there's not a 
vote of the local units to move forward with this. Are you 
aware of that one way or the other?
    Mr. Leach. I will say this. There have been, at various 
times, concerns that smaller Farm Credit System entities will 
be competing against larger. But if you wonder about what the 
System has pressed downward, when the booklet approach came 
out, many, many Farm Credit System entities immediately applied 
for a National Charter, because they knew the implications. 
There would be nothing competing against them, and all sorts of 
new powers for them.
    It has dawned on them that the implications, the cherry 
picking of every local business. Let's say, Mr. Thomas, you're 
the manager of a Farm Credit System entity in a nice, rural 
community. Well, you know who the nice, local businesses are as 
well as a local banker. You will simply come and say, we can 
borrow from the Government at a given rate, and we'll give you 
a lower interest rate loan.
    Now, here let me mention there's a macroeconomic phenomenon 
that's fast emerging on the American scene. And that 
macroeconomics is that America is now a non-saving economy. And 
to the degree we do save, we're increasingly going towards 
putting our money as a society into investments like the stock 
market. So it's harder and harder and more expensive for local 
institutions to raise capital.
    By the same token, we in the Congress, because of a strong 
economy, have been able to depress our debt efforts, and we're 
paying back debt. But what this means is, in all possibility, 
especially for what we call the marginal cost of funds of the 
extra dollar that might come into a financial institution, the 
Government's cost of funds, relatively speaking, may go down. 
The private sector may go up. And this means that the 
competitive position of all Government-Sponsored Enterprises 
increases dramatically.
    With this type of step, you could well have an absolutely 
calamity on private sector financial businesses. It could be 
the greatest unfair competition in modern times.
    Senator Thomas. Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator Thomas.
    Senator Hutchinson.

  STATEMENT OF HON. TIM HUTCHINSON, A U.S. SENATOR FROM TEXAS

    Senator Hutchinson. Thank you, Senator Lugar. Thank you for 
calling the hearing today, and Chairman Leach, it's good to see 
you again. Good to have you over.
    Mr. Leach. I'm honored to be with you, sir.
    Senator Hutchinson. You make some very strong statements, 
and a very clear position, I think. You repeatedly call this 
the socializing of lending or the socializing of credit. You 
kind of mitigate a little bit at the end by saying this system 
has served farmers well. So do you object to what the current 
credit system, the way it operates?
    Mr. Leach. No, I support the current System, and so do 
farmers. And a very interesting point, Senator, is there is 
no----I mean, I represent a farm State. We consider it the 
greatest farm State, although California has greater 
production. In 25-years, I've never had a farmer come to me and 
say, Jim, I want the Farm Credit System not to serve just me. I 
want it to serve everybody else.
    And I will tell you, farmers want the Farm Credit System 
for themselves. And to the degree that you make the Farm Credit 
System serving, in many cases, their competitors, you're going 
to have support within the farm community potentially decline.
    Now, I'm confident that the System has probably gone out 
and gotten some farm group some place to endorse it. But for 
the life of me, no individual farmers I have ever represented 
have come to me and said, we want the Farm Credit System for 
others rather than for us. And I believe that to the degree it 
goes outside serving the farmer, it will lose support 
politically and socially.
    Senator Hutchinson. I am a new member to the Committee, and 
am just now becoming familiar with some of these issues. 
Explain to me simply, you've done a good job in response to 
Senator Thomas, but what will be the practical implications? If 
you have a National Charter, when you talk about agribusiness, 
when you talk about the Tysons, how is the mission changed by 
this rule?
    Mr. Leach. Well, it changes in two ways. They're looking to 
follow the bigger agribusiness customer. But frankly, that 
isn't that much of a problem today, because they serve some 
types of agribusiness customers fairly well. But they don't 
serve big corporate businesses, for example, the Deeres of the 
world. They serve those people that are into production.
    But what they want to save is rural economic development, 
which is the key thing. And that has a natural attractiveness, 
all of us that come from rural States. But what that means is 
that they want to give business loans. And people shouldn't be 
misty-eyed about it. They want to socialize credit for American 
business. And then they will define towns under 50,000. The 
Farm Credit System wants to get into real estate services. They 
want to get into car loans. They just want to do everything in 
finance.
    And what happens is, once you set up this structure, if 
you're the manager of a local Farm Credit System Agency, or if 
you're one of the regional district managers, you see an 
infrastructure out there, and you say, why can't we expand, 
because we have this great infrastructure. It's very natural.
    But there's no community demand for it. And it simply is 
another tap on the Federal treasury that is going to 
jeopardize, I believe, America's private market system.
    Senator Hutchinson. So the socialized credit, as you've 
called it, is okay for small, individual farmers, but we 
shouldn't expand that into business and the broader----is that 
a fair----
    Mr. Leach. Well, we have developed GSEs for limited 
purposes. One purpose, for example, in housing. For Fannie and 
Freddie, we developed a secondary market. And also for the 
Federal Home Loan Bank System, it serves as a secondary market 
for housing loans.
    Another GSE we----
    Senator Hutchinson. You have no objection to it?
    Mr. Leach. No, I don't.
    Senator Hutchinson. Is that socialized credit, though?
    Mr. Leach. Yes, it is. Yes, it is. But Congress tried to do 
it with as limited a purpose as possible. By the way, Freddie 
Mac, when it was set up, was set up as a year and a half trial. 
It was intended to be privatized. They ended up privatizing 
ownership and keeping their public powers, a very unique 
circumstance.
    In any regard, each of these GSEs wants to expand their 
authority and spread their wings as widely as they can. It's an 
understood phenomenon. And it's up to the public decision 
makers to say, do you want to have a private economy or do you 
want to have a greater socialized credit.
    Now, in the Farm Credit System, the idea was that it looked 
like credits in agriculture was going to be very difficult to 
come by, So for the sake of the family farmer, we established 
this System.
    But let me give you an example of the types of abuses that 
come into play. We have established another secondary market 
for agricultural loans called Farmer Mac, a really wonderful 
intended institutional arrangement. It didn't quite work for 
its intended purposes on a profit-making basis, because 
community banks wanted to keep their good loans and would only 
want to give a bad loan to Farmer Mac.
    So what happened to Farmer Mac? One American commercial 
bank bought a third interest in it. One-third. And then to make 
money, because it's a money losing proposition, all it does 
basically speaking today is arbitrage. That is, they take down 
Government credits at a given amount and then they buy lesser 
rated securities. For example, you take down a Government 
credit, let's say, at a given time, at 6-percent for a given 
tenure, time period, and then you buy a bond, whether it be AAA 
or B, BB. And you buy it at 7-percent.
    So you take down your Government credit at one rate and you 
arbitrage with other types of credits to other rates that have 
nothing to do with agriculture. These are powerful, powerful 
entities, each one going in new ways that were never conceived 
by the U.S. Congress. That is what----and by the way, Farmer 
Mac has less than $100 million equity, and it has billions of 
dollars of arbitrage activities.
    And it's an absolutely political science umbrage, the way 
it operates. And what you're going to have here is some Farm 
Credit System with National Charters, not local Charters, 
coming up with new ways to tinker with the system. And 
outsiders are going to figure it out very quickly and take 
advantage of it.
    Senator Hutchinson. I spent a good part of last week in the 
delta of Arkansas talking, learning, studying agriculture in 
our delta and where the availability of credit means the 
difference in survival or bankruptcy for these farmers. It's 
your contention that a National Charter works against the 
welfare and the benefit of individual farmers?
    Mr. Leach. Well, let me ask you how it helps them any more. 
Your local Farm Credit System entity can serve them fully. 
Absolutely fully. If they claim that the loan is too big, they 
can share it with other Farm Credit System entities in other 
parts of the country. What farmer is not served by the Farm 
Credit System, and what farmer is going to be better served by 
this?
    And then, who is it that these people want to serve? If you 
go to the agricultural area, is it going to be a hog producer 
from out of State? Is that helpful for the Arkansas hog 
producer? You're a razorback State. I don't know. You've got to 
tell me, you have to name, I mean literally name a farmer 
that's going to be helped by this.
    Now, you might say that the farmer may invest in a business 
in town and that maybe you can come up with some lower priced 
loans for that, and that's true. That's quite possible.
    Senator Hutchinson. Or you could argue that economic 
development in general is going to benefit the area and 
therefore benefit----
    Mr. Leach. You could. Then the question is, do you want to 
do this through the Government credit mechanism, or maybe you 
represent a lot of community banks that don't function. I don't 
know.
    But I will tell you, in rural Iowa, we are unbelievably 
competitive in sources of credit. Just unbelievably 
competitive.
    Senator Hutchinson. Thank you. I know my time has long 
over-expired.
    The Chairman. That's fine, and those were important 
questions.
    Senator Crapo.

   STATEMENT OF HON. MIKE CRAPO, A U.S. SENATOR FROM INDIANA

    Senator Crapo. Thank you very much, Mr. Chairman. And 
Chairman Leach, I, too, appreciate having you over here in the 
Senate with us. I served with you in the House and appreciated 
those days and learned to work very closely with you there.
    As a matter of fact, I served there on the Commerce 
Committee when we worked for many years on the financial 
services modernization legislation and came over here and ended 
up, for one of my committees, serving on the Banking Committee 
working on it as we finally put legislation together that 
achieved passage.
    And one of the pieces of the Gramm-Leach-Bliley financial 
services modernization legislation that I and many other 
members from States with large rural constituencies and strong 
agriculture bases fought to include was one that enhances small 
bank access to the Federal Home Loan Bank System by removing 
certain membership requirements and making it more easier for 
small banks to have access to FHLB advances for ag and capital.
    This provision, I think, gives small banks access to 
cheaper capital. And one of the reasons that this was so 
important was that it allows them to better compete with the 
Farm Credit System that has access to cheaper capital.
    Could you tell me how this new proposal that we're talking 
about today would impact, if you could, or if you have an 
opinion on it, how it would impact the ability of our private 
sector financial institutions to meet the lending needs of our 
ag community?
    Mr. Leach. Well, you raise a very profound feature of the 
financial modernization package. That is, a lot of people don't 
realize that aspects of the financial modernization were 
designed to serve rural America dramatically. And so if you're 
an individual farmer, for example, in Arkansas, you'll be able 
to go to the Farm Credit System for a loan. You'll also be able 
to go to a commercial bank, which will also have the capacity 
to tap into the Federal Home Loan Bank System, which is another 
GSE.
    So you will have more sources of credit than you've ever 
had before. The farmer is really in the driver's seat on 
finance today. If market prices were only a little bit better. 
And so I don't see how this enhances in any way the individual 
farmer. What it does do is take the Farm Credit System and give 
it new jurisdictions, new powers that are unknown in their full 
dimension.
    Senator Crapo. Well, thank you. And I'm sure you know, 
coming from your State, that in agriculture today, one of the 
big problems is frankly getting continuing financing for 
operations of farming operations that are not able to meet 
their financial obligations. As I understand your testimony, 
it's your belief that the proposal that is on the table is one 
that would not increase the availability of capital or 
financing to farm producing entities. Is that correct?
    Mr. Leach. It does not increase in any way whatsoever to 
any individual farmer any credit availability. It probably 
increases credit availability to competitors of modest sized 
farmers, because it will make credit availability easier for 
large agribusiness.
    Senator Crapo. I know you've basically said this in a 
number of different ways, but I'd like you to one more time 
just briefly describe to the Committee, what was the original 
purpose of the Farm Credit System?
    Mr. Leach. The Farm Credit System was set up at a time when 
we were looking at serious problems of credit in the 
Agriculture community, to serve individual farmers, 
particularly of modest means. And it's ironically the success 
of the Farm Credit System that has caused it to want to look to 
new and greater market penetrations.
    So I consider this to be a very natural desire within the 
System managers, but not one that has anything to do with the 
individual farmer, and everything to do with whether or not the 
System ought to be serving non-farmers.
    Senator Crapo. With regard to those non-farmers that you 
reference there, regardless of the question of whether there is 
a need to expand basically a Government supported financial 
system for those farmers, well, I guess the question I'm 
getting at is, is there a need for a new source of lending for 
those non-farm entities, or those non-farm production services 
that would be reached by this proposal?
    Mr. Leach. Right now, in rural America, as we all know, 
there are some real traumas that are largely based on pricing. 
But if you add up the sources of credit, whether they be the 
Commercial Banks, Insurance Companies, the Farm Credit System, 
there are three Government-sponsored enterprises that currently 
serve rural America: Farm Credit System, Commercial Banks that 
can tap into the secondary market; two other Systems, one is 
the Federal Home Loan Bank System, which under the recent 
modernization law they can now do, and then thirdly, Farmer 
Mac.
    So basically speaking, there are three GSEs serving 
agriculture. No other part of the American economy has anything 
like that. And partly, I think, because of this competition 
within the GSEs, the Farm Credit System would like to get out 
and serve new markets that are non-farm markets. And that is 
really what's at issue today, whether the U.S. Congress wishes 
to change the mandate of the Farm Credit System into a non-farm 
mandate.
    And my own view is that we ought to keep it as a farm 
mandate rather than a non-farm mandate.
    Senator Crapo. Thank you.
    The Chairman. Thank you very much, Senator Crapo.
    Mr. Leach, we thank you very much for coming and spending 
this time and responding to these questions of Senators who 
have quite an interest in this subject.
    Mr. Leach. Thank you. I appreciate your courtesy.
    The Chairman. It's a privilege now to call before the 
Committee the two sitting board members of the Farm Credit 
Administration. They are the Chairman and Chief Executive 
Officer, Michael Reyna, and Ann Jorgensen.
    We welcome both of you.
    Let me just say for benefit of the Committee and those 
following the hearing, last month I had a very good opportunity 
to visit with both Chairman Reyna and Ms. Jorgensen about 
affairs over at the Farm Credit Administration. This committee 
has oversight for Farm Credit, as we recited a little bit of 
the history that was much more difficult during the 1980s, the 
1990s being a happier time.
    But new members of the Committee will know that the 
Committee has taken seriously this responsibility. Credit for 
farmers and for rural communities in our country is the prime 
responsibility of the Committee. And Farm Credit 
Administration, in our judgment, has done well by all of these 
folks.
    Now, at the time of our visits, I was informed that a 30-
day rule or 30-day hearing period would commence. And so one 
reason for having this hearing today, we're about, by my 
calculation, about 10-days into the 30-days. There are still 
20-days to be heard. And it was important, even though there 
are all sorts of priorities of the Committee, to move swiftly, 
so that a number of parties could be heard in public. This may 
or may not stimulate others who will wish to inform the System 
of their views. But we certainly wanted to make certain at a 
timely point that we fulfilled our responsibility, and we are 
grateful to both of you for coming this morning to present your 
thinking, the case to be made for the rule you proposed.
    I'll ask you to testify, Chairman Reyna, and if you have 
additional testimony, Ms. Jorgensen, we'd be pleased to hear 
from you likewise.

    STATEMENT OF HON. MICHAEL M. REYNA, CHAIRMAN AND CHIEF 
 EXECUTIVE OFFICER, FARM CREDIT ADMINISTRATION ACCOMPANIED BY: 
              HON. ANN JORGENSEN, FCA BOARD MEMBER

    Mr. Reyna. Mr. Chairman and members of the Committee, my 
name is Michael Reyna, Chairman and Chief Executive Officer of 
the Farm Credit Administration. Joining me is my fellow board 
member, Ann Jorgensen, who I might note returned from her 
anniversary trip to be here with us today.
    The Chairman. We thank you.
    Mr. Reyna. I'm pleased to be here with you today to discuss 
the role of the Farm Credit Administration and the Farm Credit 
System in providing sound, dependable and affordable credit to 
American farmers and ranchers, their cooperatives, rural 
utilities, rural homeowners, in both good times and bad. I'm 
pleased to report to you that the financial condition of the 
System is strong, despite the challenges and difficulties 
facing agriculture.
    I plan to use this opportunity to explain our proposal and 
proposed regulation concerning National Charters for System 
institutions. Just briefly, the FCA is an independent Executive 
Branch agency of the Federal Government. It Charters, regulates 
and examines all System institutions. The responsibility of FCA 
is to ensure that System institutions operate safely and 
soundly and comply with all applicable laws.
    The FCA's governing body is a full time three member board. 
The President, with the advice and consent of the Senate, 
appoints each FCA board member for a six-year term. The 
President designates one board member as Chairman of the Board, 
who serves until the conclusion of that member's term. The 
Chairman also serves as the FCA's chief executive officer.
    I have provided written testimony to the Committee, and I'd 
like to skip ahead to the issue that's before the Committee 
today, if I might.
    The Chairman. The full testimony will be made a part of the 
record.
    Mr. Reyna. Thank you.
    Perhaps the biggest challenge facing the System is the fact 
that it is a single sector lender in a shrinking market. The 
number of farmers and ranchers has steadily declined since the 
System was founded in 1916. However, the System's mission, to 
finance agriculture in both good times and bad, remains the 
same. And in contrast, the System's competitors can abandon 
agriculture during recessions, and lend instead to the other 
sectors of the economy where profit potential is greater and 
credit problems fewer.
    Loan portfolios of System institutions, as single industry 
lenders, are concentrated in agricultural commodities. Some of 
the larger System institutions have successfully diversified 
the Agricultural commodities in their loan portfolios. As of 
September 30, 2000, however, there were 197 instances at 135 
associations where loans to a single commodity exceeded 
capital.
    The System lends overwhelmingly to agriculture, which is 
the sector of the economy that is particularly vulnerable to 
changes in commodity prices, currency fluctuations, bad 
weather, diseases, pests and other difficulties. The System's 
market share slipped during the farm crisis of the mid-1980s. 
During the 1990s, the System's market share rose modestly and 
then leveled off.
    Historically, the Charters of many System associations have 
confined their operations to geographic areas where the 
agricultural economy is dependent upon two or three 
commodities. These geographic barriers make it increasingly 
difficult for associations to compete. Trade creditors are not 
subject to geographic limitations, and geographic restrictions 
on commercial banks have eased in the past decade. New 
technology, such as e-commerce, also expands geographic markets 
for lenders and other financial service providers.
    Obviously these commodity and geographic concentrations 
pose a special challenge to the System and to FCA as a safety 
and soundness regular. The System is responding to these 
challenges. Many System associations have merged, consolidated 
or restructured their operations in the past three-years. As a 
result, these associations have become more efficient, which 
lowers cost of credit to farmers, improves customer services 
and increases earnings to these borrower-owned institutions.
    System institutions have also embraced technological 
innovation, and they routinely use the internet to reach 
customers. These changes are good, but more is needed to assure 
that the System can meet the challenges facing a single 
industry lender in an economic environment that is undergoing 
continual and rapid change.
    If the Farm Credit System is to remain a viable source of 
credit for American's farmers, ranchers and rural communities, 
as Congress directed, it must be able to respond to these 
changes in these markets that it serves. This is not a new 
concern. Our proposed rule on National Charters would help the 
System modernize its credit delivery structure, and at the same 
time maintain safe and sound operations. The National Charter 
rule would end FCA's practice, and I stress it is a practice, 
of generally issuing exclusive territorial Charters to direct 
lender associations.
    The FCA's authority to grant and amend Charters to System 
institutions is clear and unambiguous. The courts have 
reaffirmed this authority on several occasions. With limited 
exceptions, Farm Credit statutes do not require exclusive 
charters for System institutions. Instead, the FCA, as a matter 
of policy and practice, usually issued exclusive Charters to 
direct lender associations.
    Notwithstanding this fact, the territories of a number of 
associations have overlapped for some time. Over-chartering has 
not posed any safety and soundness concerns. Again, just to 
digress for just a moment, there's in excess of 200 counties in 
the United States right now where over-chartering currently 
exists. About 100 or more of those have been over-chartered for 
upwards of eight-years, and again, no safety and soundness 
concerns.
    The Agricultural Credit Act of 1987 encouraged the Farm 
Credit System to restructure by creating four new types of 
institutions: Farm Credit Banks, Agricultural Credit Banks, 
Federal Land Credit Associations and Agricultural Credit 
Associations. This restructuring has led to numerous instances 
of overlapping territories and competition among associations. 
This has led to the increasing public discussion and debates 
over whether FCA should end its policy of exclusive Charters 
for direct lender associations.
    Our proposed National Charter rule culminates a decade of 
discussion and debates about how to ensure that the System 
remains safe and sound and relevant to farmers, ranchers and 
other rural residents who borrow from it. In May of 1990, the 
Secretary of the Treasury issued a report on GSEs that 
recognized the System faced unusual business risks. This report 
acknowledged that System Charters limit the operation of 
individual associations to specific regions, causing an 
institution's performance to rise and fall with the fortunes of 
a single crop or perhaps those with a limited number of 
customers.
    Although the Secretary's report made no recommendation on 
how best to address the problem, it generated much thought, 
discussion and debate. It actually didn't formally recommend 
the consolidation of System institutions, but it certainly 
implied that, that was the direction that would best suit the 
System. I actually happen to disagree on that point.
    The FCA raised the first question about ending the policy 
of geographically exclusive Charters in 1994 when it asked the 
public to comment on a proposed board policy statement to end 
non-exclusive Charters. At other times during the past decade, 
FCA has sought input and ideas from a wide variety of sources, 
including the general public, academicians and policy experts. 
In July of 1998, the board issued a philosophy statement that, 
among other things, announced support for abolishing geographic 
restrictions on System institutions. The first major step in 
implementing this philosophy occurred in 1998 when FCA 
published the rule that would have repealed regulations that 
required notice and consent when a direct lender made or 
participated in loans in a territory of another association.
    The Agency received over 200 letters, considerable comments 
during the 180-day comment period. Reaction was split. The 
board suspended action in early 2000 to study the matter 
further.
    In April of 2000, the board adopted a final rule that 
repealed notice and consent requirements that applied to System 
institutions who bought participation interests in loans that a 
commercial bank made in the territory of another System 
institution. By repealing these regulations, the FCA board 
authorized System institutions to participate in loans that 
non-System lenders, banks and others, made, and made to 
eligible farmers and ranchers anywhere in the United States.
    The FCA did not repeal the notice and consent requirements 
for direct lending. Instead, the board announced in March of 
2000 to remove geographic barriers by granting National 
Charters to System direct lenders that apply for them. The FCA 
sent a booklet to all System institutions that provided 
guidance on National Charters. We also posted our booklet on 
the web site at that time.
    After this initial process, about 97-percent of all 
eligible institutions indicated an interest in an expanded or 
National Charter. The booklet imposed no new System 
requirements or no new requirements on System institutions. And 
what it did is indicate the board's willingness to accept a 
National Charter application from any direct lender that 
voluntarily applied for one.
    Our Charter initiative sparked an intense public interest 
and debate when the booklet was published in the Federal 
Register, and we received over 1,000 comments on the National 
Charter initiative. Several parties raised procedural concerns 
about the booklet. They believed that the law requires FCA to 
pursue notice and comment rulemaking for National Charters.
    While FCA's legal counsel continues to believe that the 
Agency may issue or amend Charters without conducting a formal 
rulemaking, the board decided to go ahead and propose a rule. A 
rulemaking dispels any doubt that this initiative does not 
comply with applicable administrative procedure laws. Second, 
the rule will establish strong business planning requirements 
for any association that applies for and receives a National 
Charter. And third, the rule requires associations that request 
and receive a National Charter to comply with all existing FCA 
regulations that impose strong and enforceable capital, loan 
underwriting and internal control requirements on all System 
institutions.
    Before I describe our national proposal rule in greater 
detail, I want to reiterate that the ideas expressed in the 
proposal are not new. Indeed, FCA and the System and Commercial 
Banks and the Trade Associations, Academicians, policy experts 
have debated the removal of geographic restrictions on System 
institutions for several years. The FCA adopted a proposed rule 
on January 11th of 2001 and sent it to the House and the Senate 
Ag Committees for 30-day review. The rule was published in the 
Federal Register on February 16th for a 30-day comment period. 
And I want to assure you that we'll seriously consider and 
carefully weigh all substantive comments that we receive about 
this proposal.
    I want to speak briefly about the criteria for National 
Charters. The proposed rule would establish clear standards so 
the direct lender associations may apply for and receive and 
operate safely and soundly under a National Charter. The 
National Charter authorizes a direct lender association to 
exercise all powers conferred onto it under the Farm Credit Act 
and FCA regulations throughout the United States and the 
Commonwealth of Puerto Rico, or within the territories that FCA 
specifies.
    And again, at this point, I want to stress that it's 
geographic broadening of the Charter. It has no effect on new 
products or services. That is not the change in the Charter 
that is being proposed here.
    National Charters will not initially include the 
territories of certain associations that currently operate in 
Alabama, Mississippi, New Mexico and parts of Louisiana. The 
statute requires shareholders in these associations and their 
funding banks, in some cases, their boards of directors, to 
consent before FCA can add the territory to the Charter of any 
other System institution. There are protected areas that do not 
authorize FCA to over-charter those areas. FCA initiated 
separate rulemaking so that the farmers and ranchers who own 
those associations in those particular four States will have an 
opportunity to vote on whether to allow other associations to 
serve their territories.
    No direct lender or association under cease and desist 
order that's become final is eligible to request a National 
Charter. Once an association receives a National Charter, the 
FCA reserves the right to restrict the association's operations 
if it fails to operate safely and soundly. Each association 
that receives a National Charter will be assigned a local 
service area. For existing associations, LSA is the local 
territory that they served immediately before receiving a 
National Charter. Under the proposed rule, each association 
with a National Charter must offer credit and related services 
in its LSA.
    Additionally, the LSA requirement will ensure that the 
System as a whole carries out its public policy mission of 
extending credit and related services to farmers, ranchers and 
other eligible customers in every part of the United States. 
Therefore, each association with a National Charter must 
provide dependable, sound and adequate, competitive and 
constructive credit and related services to all eligible, 
creditworthy customers within its LSA on a priority basis, 
consistent with safe and sound lending practices.
    FCA expects each Nationally Chartered Association to make 
special efforts to serve young, beginning and small farmers in 
the LSA.
    The proposed rule establishes procedures that each 
association must follow when it applies for a National Charter. 
Additionally, each association that applies for a National 
Charter must comply with new regulatory and business planning 
requirements, and at a minimum, an acceptable business plan 
must include a mission statement, internal and external factors 
that are likely to affect the Association during the planning 
year, quantifiable goals and objectives, pro forma financial 
statements for each year of the plan, an operating budget, a 
capital adequacy plan, and a detailed plan for activities 
within the LSA. These business plans must be updated each and 
every year.
    Each Nationally Chartered Association must comply with 
statutes and regulations that govern capital adequacy, loan 
underwriting and servicing requirements, internal controls, 
consumer protection, equal credit opportunity and fair lending 
practices. Additionally, the FCA will allow only direct lender 
associations that operate in accordance with capital, assets 
quality, management, earnings, liquidity, interest rate 
sensitivity and other safety and soundness standards to lend 
and offer related services nationally.
    In conclusion, Mr. Chairman, members, the Farm Credit 
System must meet the challenges of a rapidly changing 
agricultural economy to achieve its mission of providing sound 
and dependable and affordable credit to farmers, ranchers and 
their cooperatives. This System has made significant progress 
in building and maintaining its financial strength in the past 
decade so that it can better serve customers. However, the pace 
of change in the rural economy is quickening. And the System 
must remain ever vigilant if it is to remain relevant to 
farmers.
    Improving geographic diversity, reducing industry 
concentration of System loan portfolios is essential for 
mitigating safety and soundness risks. The FCA board believes 
that the proposed rule on National Charters ensures that the 
system remains a dependable source of credit for farmers in a 
competitive and rapidly changing environment.
    I thank you for the opportunity to address this committee 
about the challenges facing both FCA and the System, and to 
explain the proposed rule on National Charters.
    I'd actually like to take just a moment, if I might, to 
share with you some words that took place probably three and 
maybe even four-years ago, just briefly. From June of 1996, 
Comptroller of the Currency, Eugene Ludwig: ``Rewriting the 
laws that govern banking and financial services must be based 
on fundamental principles, principles that respect rather than 
fight market forces that are shaping the banking industry.''
    Later that year, he also said before the annual financial 
services forum of the New York State Bankers Association, 
``Financial modernization is first and foremost a safety and 
soundness issue. Strategic risks in this case, the risk of not 
being able to provide or not being able to offer the products 
and services that the market demands, is in the long term the 
most important risk facing the financial industry today. In our 
dynamic economy, if banks are not able to offer new products, 
to evolve as the market evolves, they will not survive as a 
healthy entity.''
    Ricky Helfer, former FDIC Chairman, said in 1997, 
``Modernization of the Financial System is necessary to achieve 
an efficient and competitive financial services industry. 
Financial modernization should strengthen banking organizations 
by allowing diversification of income sources and better 
services to customers. The lessons we draw from these events, 
which are major regional and sectoral downturns, is that 
attempts to ensure safety and soundness of the Financial 
System, the Institutions must be allowed to diversify.''
    And finally, I will share this. From a book entitled The 
History of the Eighties: Lessons for the Future, it's quoted, 
``The rise in the number of bank failures in the 1980s had many 
causes which were beyond the regulators' power to influence or 
offset. These included broad economic and financial market 
changes. The structural weaknesses that inhibited geographic 
diversification and made many banks vulnerable to regional and 
sectoral recessions.''
    The promotion of diversification geographically is not new. 
Other financial regulators have noted it, commented on it and 
served as the basis for far broader financial modernization 
efforts that took place last year.
    Thank you, Mr. Chairman. I'm happy to answer any questions.
    [The prepared statement of Mr. Reyna can be found in the 
appendix on page 50.]
    The Chairman. Well, thank you very much, Mr. Chairman.
    Let me just comment briefly on some of the testimony that 
you did not have an opportunity to present, but which is a part 
of our record, which is important in the history of this 
subject. And those who experienced the Congressional and 
banking trauma of the 1980s are certainly aware of those items 
you touched upon during that time because the savings and loan 
crisis consumed much of the attention of the Congress for years 
and the Farm Credit crisis for at least the better part of 
three-years, as I recall.
    And in 1987, at the time the new legislation was being 
formulated and was finally passed, in the Chart that you have 
presented, derived from the Department of Agriculture data, you 
had a cross-over in which commercial banks took a larger share 
of farm debt. And they've continued to maintain that to the 
present.
    Prior to that time, the Farm Credit System, when I take a 
look at this chart, had from 32- to 35-percent of farm debt. 
Essentially in those days, commercial banks were more in the 
24, 23 category. But now, it's about 41-percent for commercial 
banks, 26-percent for Farm Credit, more or less, as you've 
presented it. And there is no particular reason why that 
necessarily would change. But these are the two largest 
sources. Life insurance company loans are another large source, 
and have not been mentioned today, roughly 23-percent. And then 
various other individuals and situations, in some States more 
prominent than others.
    You've mentioned in your own testimony, portions that you 
did not recite this morning, the Farm System's outstanding 
loans were 16.3-percent to farmers less than 35-years of age. 
That is a very, very important item. The testimony before our 
committee about the aging of American agriculture, the 
opportunities for young farmers to get into it are a very, very 
important factor, and you've recognized that, as would be 
appropriate for the Farm Credit System.
    And 20.7 percent were beginning farmers with 10-years of 
experience or less. That might include some of the group that 
were 35 or younger. But once again, a critical element in terms 
of the dynamism of American agriculture if there are to be 
replacements out on our farms. And 57.9 percent were to farmers 
who had annual sales of $250,000 or less. As we've heard in 
previous testimony, on the restructuring of American 
agriculture, the $250,000 level is significant, because only 8-
percent of American farm entities have sales of more than 
$250,000. But they do arguably about 85-percent of the 
business.
    So we have an extraordinary dilemma as we begin to take a 
look at another Farm Bill. As most Americans are not aware, the 
high degree of that which is done in livestock and crops is by 
a very small number of people.
    But in any event, the bulk of your loans are to those who 
are less than the 8-percent, who are very important, and who 
really need credit and one could argue, the most commercially 
viable of the farms, the ones from which most income is derived 
by those farmers from the farm, as opposed to almost each of 
the entities that is smaller.
    Now, the dilemma you point out later on is that given the 
lack or the decline of income coming from farms in the last 
two- or three-years, and some can cite longer periods in 
certain parts of the country, this has put some stress upon 
lenders such as your institutions, who in fact are feeling this 
pain and the uncertainty of repayment. There was a sigh of 
relief in many banks, whether they were private or Farm Credit, 
when the double AMTA payments were received this year, and 
people, country banks, whichever form they were, got paid. And 
it led to a feeling that there might be another year for many 
of these entities who were in jeopardy.
    But as you point out, this is a problem. If this is the 
bulk of your portfolio and it's under some stress, in other 
words, there may be a declining spread in terms of interest 
rates, and all you have been building ever since 1987, a 
substantial amount of capital, which gives you safety margins, 
that cannot necessarily be taken for granted. So you have cited 
other banking authorities outside agriculture who talk about 
spread of loans, as opposed to the concentration that you have.
    This is a part of our dilemma. Clearly, the Farm Credit 
situation was set up to help farmers, to help people in 
agricultural America. And one of our debates throughout the 
1980s was, are they being well enough served, are there enough 
sources. In some counties of America, the answer apparently was 
no. So the question is, how do you fill in that void, so that 
all of us, wherever we are, receive credit because a lot of 
agriculture is remote by definition. There are not large 
population centers, as there are in urban areas.
    So on the one hand, the idea is to provide a Federal entity 
that helps everybody. On the other hand, we want that Federal 
entity to remain viable. And that was the dilemma we faced in 
the mid-1980s. There wasn't going to be much credit if the 
whole thing collapsed.
    So as a result, as you recall, as a historian of all this, 
there were estimates before this committee that as much as $11 
billion of guaranteed loans, or some type of Federal safety 
net, might be necessary to work out over the course of many 
years the problems of the Farm Credit System.
    Now, my recollection is that fortunately, it took about 
$1.4 billion, and those loans were fairly promptly repaid by 
the System, to its credit and to all who were involved in it. 
So as a result, all the dilemmas that faced the savings and 
loan and the fallout from that did not attend this, and that's 
a credit to the Farm Credit System, it's a credit to this 
committee and our House counterpart and others who really 
worked line by line through that legislation for the better 
part of a couple of years. And it has worked well since.
    But now you come today and you point out there are some 
trends. And they are disturbing ones to all of us. Fewer 
farmers, fewer entities at all that are out there. And those 
who are young are especially troubled because of the difficulty 
of capital accumulation. And maybe through our own farm 
policies an increase in land values every year now for several 
years. So that if you are in a buying mood, you've got more of 
a problem, and more of a credit problem, certainly.
    So I sketch in all this as you would have if the Committee 
had asked you to recite the whole paper. But I think these are 
important facts and they are part of the record.
    Now, having said all that, it's your statement, as I 
understand it, that you believe you have statutory authority to 
issue this rule, to call for the 30-day comment, as you have, 
to listen to what everybody has to say, take seriously these 
comments as well as our hearing today and the comments that may 
be made, and then to proceed. Is that essentially your position 
or do you want to comment on that?
    Mr. Reyna. Senator, I think you've accurately captured the 
essence of my comments. It has been the FCA's practice since at 
least 1933 to issue exclusive Charters. In more recent years, 
as I mentioned, there has been some over-chartering of 
territories when it made sense to do that as a result of 
mergers and consolidations. What we would do with this rule is 
to end that practice. The statute does not prohibit the 
issuance of a National Charter, nor does it require the 
issuance of exclusive Charters. It's been a regulatory or 
administrative practice.
    The Chairman. In his testimony, Congressman Leach was 
highly critical of the activities you took last year, feeling 
that this did not bring about a rulemaking process or 30-days 
and so forth. But nevertheless, you did not proceed. And when 
we visited earlier this year, as you recall from our 
conversation, which is a confidential conversation, but this 
part of it, I think is fair to say, that I thought there would 
be some concern if this occurred without there being a formal 
rule and a 30-day period. You shared that view.
    And I indicated we would probably want to have a hearing, 
which in fact we are having, because I believe this is good 
public policy to do, so that everybody understands the 
situation. Whatever may be the history, as you mentioned, back 
as early as 1994, long before your tenure or that of Ms. 
Jorgensen on this board, there was comment about this 
geographical situation. So it's not an entirely new item, it 
sort of spreads over six- or seven-years.
    But nevertheless, it has probably come for reasons you've 
suggested in your testimony today, namely, real problems out in 
farm country with your clients, with the spreads, with 
districts that maybe have, as you point out, only two or three 
crops that are prominent. And if those two or three are in very 
difficult shape simultaneously, so might be the Farm Credit 
entities who are servicing them.
    So for all these reasons, you're suggesting it is prudent 
now, not in a time of crisis like the mid-1980s, or with the 
whole thing underwater, that we try to think about this. But 
nevertheless, it has its controversies. That's the reason we 
are all being heard and many more will be heard. And you heard 
from a lot of people last year, as it turned out.
    But I appreciate the opportunity to explore these 
situations, for you to make your case as well as others who 
have studied this, have a strong interest in it to do theirs.
    I'd like to call upon my colleague now, Senator Crapo, for 
his comments and questions.
    Senator Crapo. Thank you very much, Mr. Chairman.
    Chairman Reyna, one of the issues I want to get into is 
just what the original Charter and purpose of the Farm Credit 
System was and is, and whether this proposal is going to change 
that at all. As I understand it, and I'd like you to correct me 
if I'm wrong on this or elaborate, but the original purpose 
seems to have been to provide a lower cost sort of access to 
capital for farm producers by providing a system of financing 
in which there is, because of the Government guarantees, a 
cheaper access to capital.
    And that this effort was not intended to result in creating 
a new competitive entity that would be competitive with the 
private sector, but that the loans were intended primarily to 
be available for those who could not get financing in the 
private sector's general system. Am I correct about that?
    Mr. Reyna. Ninety-five percent.
    Senator Crapo. Okay, why don't you correct it.
    Mr. Reyna. Unlike the programs that USDA operates that 
serve as lender of last resort, the Farm Credit System doesn't 
have a Congressional mandate to do that. The mandate that 
Congress has issued to the System is to serve all types of 
agricultural borrowers that have a basis for credit, large, 
medium and small. But they have to have a basis for credit, 
which means they have to have repayment ability.
    So the programs or the products that are offered by the 
Farm Credit System are not specifically targeted at limited 
resource or any other type of small borrower.
    Senator Crapo. So there's no requirement under the law as 
you see it that there be a lender of last resort element in the 
activities of the Farm Credit System?
    Mr. Reyna. No, I agree that there is not. I also think that 
the System as devised by Congress is working. USDA and its 
programs serve a very important role in the marketplace. Before 
this position I served as a Farmers Home director in 
California, running those programs for a period of time.
    The Farm Credit System does not have the same mandate or 
mission. It is to provide a dependable and competitive source 
of credit for agriculture in rural America. That is outlined in 
the preamble of the Act. And I think that the mission is still 
valid today, the need is still valid today.
    Senator Crapo. One of the criticisms that is very 
aggressively made by those in the private sector who provide 
agricultural financing is that it's not fair for the Federal 
Government to basically provide support or subsidy to a Farm 
Loan System and that loan system then be in direct competition 
with the private sector. How would you respond to that 
criticism?
    Mr. Reyna. I understand the concern. But contrary to what 
some might suggest, I actually think that the presence of the 
Farm Credit System as a Government-sponsored enterprise in the 
marketplace actually creates lower rates for the borrowers. And 
I think as a regulator, and when you're judging public policy, 
you have to look through to the ultimate borrower, the ultimate 
beneficiary of whatever change or modification is being 
proposed. I think you have to see what impact it's going to 
have.
    Whether it's good or bad per-se for a Farm Credit 
institution or a bank or other type of lender is secondary to 
the benefit that ultimately would accrue to the borrower. So if 
you've got a farmer out there that would benefit from 
competition as a result of the modification or proposed rule, I 
would say it's a good policy.
    Senator Crapo. To shift gears for just a moment, do I 
understand your testimony correctly to be that it is your 
belief that if this proposed rule is not adopted that the 
safety and soundness of the System would be jeopardized?
    Mr. Reyna. I'm saying that currently, with the narrow 
geographic territories and the commodity concentrations that 
exist in the portfolios of Farm Credit Institutions, that is 
not healthy. As a regulator, I have to sit here and tell you, 
that is not healthy to have. And I would be derelict in my duty 
if I did not come before Congress, this committee, and tell you 
that it is of the utmost importance to provide for the 
geographic diversification of these institutions, and more so 
when times are good, because when times are bad, it will be far 
too late.
    Senator Crapo. Another argument that is made against the 
proposal which you've heard some here earlier, in the testimony 
of Chairman Leach, is that there is a belief that the proposal 
will expand the lending activities of the participating members 
of the Farm Credit Service. In essence, you've probably heard 
that there will be loans provided in a broader arena of 
activities and if I understood your testimony, you indicated 
that no new products or services would be authorized by this 
rule.
    Why is it that this argument is being made? There is a very 
widespread belief that this rule will result in significantly 
expanded new products and service activities.
    Mr. Reyna. I can understand that there may be a concern, 
and I would suggest that those that have the concern should 
actually read the rule closely, because there are no new 
products or services.
    I can only speculate, and this was before I joined this 
board, there were lawsuits back and forth that involved the 
Agency and its effort to redefine eligibility that competitors 
of the Farm Credit System didn't particularly like. So there is 
a fear possibly, a residual fear possibly, that this rule 
somehow, some way, broadens the authorities, the lending 
authorities.
    What you're going to have in this situation is an 
institution that has particular lending authorities today, it's 
granted a National Charter, and tomorrow has the exact same 
lending authority. So if you don't like the lending authorities 
that a System association has today, you're not going to like 
them tomorrow, because they're exactly the same.
    Senator Crapo. Just one last question for clarification. 
It's my understanding that a lending association can lend 
outside its geographic area now, with permission of the 
resident lending association. Is that correct?
    Mr. Reyna. That is absolutely correct. It is also more 
costly in some instances to do that, and it's not always 
granted. If I could just use an example, if you and I are 
lenders, and you want to make a loan to a farmer in my 
territory, in the current System structure, you'd have to come 
to me and tell me, I want to make a loan in your area, and I 
need your approval to do that. I could say no. I might not even 
be making a loan to that farmer, but I could say no. You 
wouldn't be able to serve that farmer, I'm not serving that 
farmer, so the farmer is unserved.
    That happens today. Unserved by the System, I should say. 
The farmer might be able to go to a bank or some other type of 
lender and get credit, or USDA. This board did take action to 
allow the System to participate in loans that are made by 
banks, by the non-System lenders, so they would share the risks 
and the profit that goes along with that. And we did away with 
the consent and notice that's required for those types of loans 
that are made. That is currently in court and has yet to be 
resolved.
    Senator Crapo. Thank you.
    The Chairman. Thank you very much, Senator Crapo.
    Chairman Reyna, as you have heard, Congressman Leach 
stressed from his experience as Chairman of the Banking 
Committee some reservations people have in financial circles 
about the changes in what might occur. And they touch upon 
another theme that Chairman Leach did not bring up, but that 
many have around this table, that is agricultural concentration 
generally.
    Now, last year, the Committee took action to try to provide 
for much more antitrust authority and scrutiny of agriculture 
by having a person in the USDA. There are some on the Committee 
who feel we ought to appropriate one of the positions and the 
Department of Justice should move you more aggressively in this 
area. But from hearing to hearing, a great deal was said about 
concentration, in the Cattle industry, in the Hog industry, in 
the Poultry industry and others.
    Today, Congressman Leach mentioned specifically two 
companies for illustrative purposes. He didn't allege that 
they're making loans or dealing with you, but Cargill and John 
Deere, for example, two large and well respected American 
firms. And at least I gathered his testimony was that these 
firms might find it useful to begin picking up ties with Farm 
Credit System, and might do so in a fairly wholesale way.
    Can you offer any illumination on what their possibilities 
are? Mr. Leach was saying they haven't maybe thought about the 
law yet, they haven't see, or the rule promulgated. But once 
they do, not only for these two, but for a whole raft of fairly 
large firms in America, ideas may light up as to the potential 
of this. And therefore, whatever might have been the best 
intention of Farm Credit, the implications of activity would be 
something else.
    Can you offer words of assurance, neutrality? What sort of 
thoughts do you have?
    Mr. Reyna. The first thing that occurs to me is that the 
particular scenario you just outlined could occur with or 
without National Charters. This rule does not preclude or 
enhance the ability of a Farm Credit institution to enter into 
an alliance or a type of partnership that you've described.
    The Chairman. So it's neutral on the concentration issue, 
as we're hearing it, from any form?
    Mr. Reyna. Correct.
    The Chairman. Ms. Jorgensen, you've sat silently through 
all of this. Let me just ask you to speak up if you have 
something to say.
    [Laughter.]
    I appreciated very much your statement, which speaks for 
itself very eloquently, and is a real contribution to our 
record. But before we conclude work of this panel, I wanted to 
acknowledge your presence and to ask you to speak if you would 
like to.
    Ms. Jorgensen. Well, thank you very much. I appreciate 
being here, and the Members of the Committee.
    Chairman Reyna's statement speaks well for what the Board 
discussed and the position of the Board, and I really don't 
have anything to add. And as you mention, I did present a 
statement, I didn't present testimony.
    I'd be happy to answer any questions at this point.
    Thank you.
    [The prepared statement of Ms. Jorgensen can be found in 
the appendix on page 66.]
    The Chairman. Your statement will be made a part of the 
record, so that it will be testimony for this hearing.
    We thank both of you for coming and for your service. Again 
for the record, and for those who follow this board, there are 
at prime strength three members. So you will be joined 
hopefully with a nominee of President Bush at an early time. I 
would just pledge on our part, as I have told you both 
privately, that we will act upon that nomination as rapidly as 
possible, because boards work best when they have their full 
membership.
    We have had this problem with the CFTC Commission Board 
from time to time, of vacancies, one or two or thereabouts. So 
we will try to encourage the Administration to take this as 
seriously as all of us have to date to get another member to 
help you.
    We thank you both for coming and for your testimony.
    Mr. Reyna. Thank you, Senator.
    The Chairman. The Chair would like to call now a panel 
comprised of Mr. Bobby D. Williams, a grain farmer and board 
member of the Heritage Land Bank of Tyler, TX; Mr. Jack 
Webster, President and CEO, Farm Credit Services of America in 
Omaha, NE; Mr. Phillip Burns, Chairman of the Farmers and 
Merchants National Bank of West Point, NE; Mr. Dale Leighty, 
President of the First National Bank of Las Animas, Las Animas, 
Colorado; and Dr. Peter Barry, Professor of Agricultural 
Finance at the University of Illinois in Urbana, IL.

 STATEMENT OF BOBBY D. WILLIAMS, GRAIN FARMER, CHAIRMAN OF THE 
                 BOARD, THE FARM CREDIT COUNCIL

    Mr. Williams. Good morning, Mr. Chairman. Thank you for the 
opportunity to appear before you today to discuss the Farm 
Credit Administration's proposal in regard to the regulation to 
permit Farm Credit System institutions to seek National 
Charters.
    I'm Bobby Williams. I'm Chairman of the Board of the Farm 
Credit Council, which is the National Trade Association 
representing the Institutions of the Farm Credit System. I also 
serve as a member of the Board of the Heritage Land Bank, ACA 
headquarter in Tyler, TX. However, today, Mr. Chairman, I would 
like to address the Committee from the perspective of my 
primary occupation as a farmer.
    The Chairman. Let me just interrupt for a moment, Mr. 
Williams, because you got started before I got everybody all 
comfortably seated.
    Mr. Williams. I'm sorry, Mr. Chairman.
    The Chairman. That's all right. I was just going to greet 
you and indicate that if possible, to confine your testimony to 
five minutes. We're not in a great hurry today and in the event 
you cannot get done in five-minutes, that will be fine. But if 
you can, that would be helpful, then we will begin questioning 
and the dialogue, really, of our distinguished panel.
    We're delighted that you're here, and please proceed. I 
apologize for the interruption.
    Mr. Williams. I noticed that when Mr. Webster gave me a 
hard look, Mr. Chairman.
    [Laughter.]
    With our son, we currently farm about 3,200 acres near Wolf 
City, Texas, which is near Dallas, Texas. Not only am I your 
typical Farm Credit borrower, I'm a typical family farmer. I'm 
not a large conglomerate or a huge integrated operation that 
some have suggested is the prime focus of the Farm Credit 
System. I can assure you that I'm the norm in our portfolio, 
and not the exception.
    Mr. Chairman, before I discuss the National Charter 
proposal, I want to thank you and your colleagues for what 
you've done for agriculture. I can tell you from a very 
personal experience that had it not been for the aid that you 
provided farmers and ranchers in the last few years, our ag 
economy would be in a very severe economic depression. We 
certainly thank you and we applaud you for what you have done.
    I have borrowed from the System since 1975. Over that time, 
I have seen a lot of change----I've served as a director for 
over 20-years----change in agriculture and change in the Farm 
Credit System.
    Mr. Chairman, I hear a lot of accusations about the System 
and what we're doing and how we're trying to pull away from 
serving family farmers, pulling away from serving young and 
beginning farmers. It's interesting to me that those 
accusations all come from those outside the Farm Credit System 
and they really don't understand how we operate or they would 
really just like to see us go away. I would challenge anyone 
that can believe these accusations to come and spend some time 
with us at our board room in Tyler and listen to the concerns 
expressed by those board members and really listen to what we 
have to deal with on an ongoing basis.
    Being a director of a System institution imposes on me the 
responsibility to make sure that the present and future 
generations of farmers and ranchers have the option of being 
served by a cooperative financial institution that they own. To 
accomplish that, change is necessary. Over the past couple of 
years, change has been constant for our association. We have 
merged, we've converted our association from being an agent of 
the Farm Credit Bank of Texas, we were operating as a Federal 
Land Bank Association, to being a direct lending, Federal Land 
Credit Association and we have just completed our conversion to 
an Agricultural Credit Association.
    Even with those changes, we recognize that maybe we have 
not done enough to ensure that our customers are insured the 
best service that they deserve. Our motive in this has not been 
to move away from serving agriculture, Mr. Chairman, quite the 
opposite. Our motive has been to structure a modern financial 
institution that can effectively serve its stockholders, the 
present ones, and be there to serve the next generation.
    I'm very proud to tell you that when our association became 
an ACA, and gained the authority to extend operating lines of 
credit, those production credits, our son, Eric, who is a 
seventh generation farmer from Wolf City, was the Institution's 
first customer. That's my motivation for being here today, sir.
    The Farm Credit Administration has proposed that System 
institutions have the flexibility to obtain National Charters. 
This represents a change, but it's not a change that impacts 
who we are eligible to serve or our cooperative structure. It's 
just a change that will allow us as directors and allow our 
management teams to have another option.
    This regulation means flexibility, flexibility for our 
institutions. But more importantly, it gives flexibility to our 
borrowers, the farmers and ranchers. With this regulation in 
place, I have the possibility of having another option, another 
choice of lenders, and I really like that.
    Mr. Webster will address a number of issues in greater 
detail. There are two things I want to emphasize. First, 
whether a Farm Credit Institution serves a limited number of 
counties, as in the case of my institution, or many States, as 
in the case of Mr. Webster's institution, or the entire 
country, which is permitted under the rule, or would be 
permitted under the rule, the control of those institutions is 
a responsibility of the Board of Directors of those 
institutions.
    Second, we're not going to ignore our responsibility to 
continue to work with young and beginning farmers. If anyone is 
sensitive to the needs of young farmers, it is parents who are 
farmers and who direct these institutions. From experience, we 
know that credit is not the solution for a young farmer, but it 
is a tool, and we'll continue to make sure that the appropriate 
tools are in place for young and beginning farmers, and that 
their needs are addressed.
    Sir, I see I'm out of time. If I may have one additional 
minute.
    Mr. Chairman, to that end, I want to use this opportunity 
to make the Committee aware of a major new effort that is being 
launched by the Farm Credit System Foundation. Within the next 
week, the Foundation will be launching an internet- based 
project to reach thousands of young and beginning farmers to 
provide them a vehicle to express their views regarding the 
existing barriers to their success in agriculture. Our goal is 
to develop the first comprehensive picture of young and 
beginning farmers far beyond what the Agricultural census of 
the USDA can provide.
    We will make the results available to you so that in your 
efforts, as you write a new farm bill, you will have far more 
information than you've ever had to deal with the needs of this 
critical segment, which is the future farmers and ranchers of 
America. the Farm Credit System Foundation is pleased to 
sponsor this effort, and we'll be happy to provide you with a 
full briefing at your convenience.
    Again, thank you for the opportunity to appear before you 
today. After the completion of Mr. Webster, we will be glad to 
take any questions that you may have for us. Thank you, sir, 
and excuse me for starting before the time.
    [The prepared statement of Mr. Williams can be found in the 
appendix on page 68.]
    The Chairman. Well, thank you very much for your testimony, 
Mr. Williams. We will ask each of the five panelists to make 
their remarks before we start the questions, so we will have 
the full colloquy at that point.
    I would just interject at this moment that clearly, you've 
offered the Committee some information of more general import 
with regard to the Farm Bill. And I would hope that each one of 
you who are here today, as you have those opportunities, will 
do that. This is a time of the gathering of the best wisdom 
that we can from people all over America on what the facts are 
on individual farms or collections of people as either young or 
old or what have you.
    So that kind of data would be very, very welcome.
    Mr. Webster, we'd like to have your testimony.

   STATEMENT OF JACK WEBSTER, PRESIDENT AND CHIEF EXECUTIVE 
            OFFICER, FARM CREDIT SERVICES OF AMERICA

    Mr.Webster. Thank you. Good morning, Mr. Chairman and 
Senator.
    My name is Jack Webster. I'm President and Chief Executive 
Officer of Farm Credit Services of America.
    I'm appearing today on behalf of the Farm Credit Council, 
the National Trade Association representing the Institutions of 
the National Farm Credit System. Farm Credit Services of 
America provides loans and related services to 43,000 
agricultural producers in Iowa, Nebraska, South Dakota and 
Wyoming. We're headquartered in Omaha. We're a cooperative, 
owned and governed by the farmers we serve. At year-end, we had 
over $5 billion invested in agriculture.
    Mr. Chairman, before I address the subject of the hearing, 
I want to echo what Mr. Williams said regarding the support 
this committee has demonstrated for American agriculture. 
Without it, conditions in the rural economy would be dire. We 
heartily support the assistance you provided, and urge you to 
continue to address the needs of agriculture, while markets 
remain depressed.
    Thank you very much, Mr. Chairman, for calling this 
hearing. We welcome the opportunity to come before the 
Committee and talk about what we are doing to improve our 
service to farmers and ranchers. The System is chartered by 
Congress for a very specific reason: to serve agriculture. I 
started in the System in 1974, and I remember back then what 
the Act said, and this is from memory, but it's to improve the 
income and well-being of the American farmer and rancher 
through the extension of sound and constructive credit.
    So I was challenged a little bit by some of the comments 
earlier, and I'm glad it was asked about. But the mission is 
not limited by the term modest means. We look for sound, 
constructive credit to improve the farmer's capability in the 
field. That is our mission. It's set out clearly in the Farm 
Credit Act. We are cooperatively owned and controlled. We're a 
permanent system of credit for agriculture which will be 
responsive to the credit needs of all types of agricultural 
producers having a basis for credit.
    To accomplish this mission, we are expected to keep the 
Institutions of the System modern, efficient and competitive. 
We are expected to provide farmers and ranchers a choice 
amongst lenders, and we must have the wherewithal to be a 
reliable source of credit, able to serve all types of farmers, 
in good times and bad. The current service territory 
limitations under which we operate date back to the 1920s. The 
regulator at that time made an administrative decision that 
agriculture as it existed then would best be served by 
institutions with limited service territories. Back then, a 
farmer's geographic location, where they lived, where they 
farmed, was the determining factor in their choice of a lending 
institution.
    Needless to say, 80-years has brought a lot of changes to 
agriculture and to the financial services industry. Today 
farmers buy inputs from, gather information from and market 
their products to entities all over the globe. The internet 
provides them instantaneous access to the global marketplace. 
Globalization has brought with it the promise of expanded 
markets and the challenge of global competition, and yet the 
farmer-owners of the Farm Credit System have seen their lending 
institutions remain geographically limited, in a global economy 
that knows no geographic limitations. They face arbitrary and 
outdated restrictions that no longer make sense in our modern 
world.
    National Charters will ensure that farmers and 
agribusinesses have access to the broadest range of lenders. 
The National Charter regulation will provide farmers and 
agribusinesses with a choice of lenders to best meet their 
needs. Farm Credit System lenders are limited to serving 
agricultural and rural communities. As essentially single 
sector lenders, we face concentrated risk. Unlike other 
lenders, we cannot move away from agriculture when the economy 
softens. We are here to serve agriculture and rural America in 
good times and bad. We work every day to mitigate the risk 
inherent in single sector lending.
    Farm Credit single sector risk is further concentrated in 
many cases by geographic risk. An institution can find itself 
facing a territory-wide drought or similar agricultural 
catastrophe. By moving beyond local geography, Farm Credit 
institutions can alleviate some of this geographic risk.
    National Charters will not change the cooperative nature of 
the Farm Credit institutions. They will continue to operate on 
the concept of one stockholder, one vote. Farm Credit 
institutions will continue to be owned and controlled by their 
member customers. Farmer control will remain a fundamental 
principle of the System.
    An institution that receives a National Charter would be 
required to amend its current business plan to ensure that 
first and foremost, it will provide loans and financially 
related services to the customers in its originally chartered 
or local service area. The conditions of the National Charter 
set forth in the proposed regulation would require an 
institution to recognize and act on its obligation to serve all 
eligible borrowers in its local service area.
    National Charters will not change who is eligible to get a 
loan from the Farm Credit. The National Charter regulation will 
provide no new lending authority for FCS institutions. The 
competitive balance between Farm Credit and commercial banks 
will not be altered by this regulation.
    It is important to remember that commercial banks have done 
very well competing in agricultural credit markets. According 
to USDA, commercial banks have gained market share in 
agriculture credit markets in 12 of the last 15-years.
    Mr. Chairman, thank you for the opportunity to testify 
today. We strongly support the FCA's proposed regulation. We 
believe it provides more choices for farmers, helps diversify 
risk in Farm Credit institutions, and helps preserve Farm 
Credit's cooperative structure. Importantly, we note that the 
FCA action does not alter the competitive balance between Farm 
Credit and commercial banks, and is fully authorized by law.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Webster can be found in the 
appendix on page 71.]
    The Chairman. Thank you, Mr. Webster.
    I'd like to call now upon Mr. Burns for his testimony.

  STATEMENT OF PHILLIP BURNS, CHAIRMAN, FARMERS AND MERCHANTS 
                      BANK, WEST POINT, NE

    Mr. Burns. Mr. Chairman and members of the Committee, I am 
Phil Burns. I'm Chairman of the Board of the Farmers and 
Merchants National Bank in West Point, Nebraska. I'm pleased to 
appear today on behalf of the American Bankers Association, to 
participate in this important hearing to discuss National 
Charters for Farm Credit System direct lending institutions.
    We thank the Committee for holding this hearing, because 
this proposal by the Farm Credit Administration represents a 
dramatic departure from the way in which the Farm Credit System 
has operated for over 80-years and poses a real potential for 
harm to producers, taxpayers and to rural America. We urge 
Congress to stop this process before it's too late.
    There are a number of factors to keep in mind when 
considering this National Charter proposal. The Farm Credit 
System has assumed a diminished role in a market brimming with 
competitive providers of agricultural credit. Banks and other 
private sector lenders have more than filled the void left by 
the Farm Credit System. The National Charter initiative is 
reminiscent of the 1980s in that the System is once again 
desperately trying to reinvent itself in order to justify their 
continued existence.
    This initiative would further the specific targeting of the 
Federal subsidy accorded Farm Credit System borrowers to the 
largest, wealthiest producers, those that need Government help 
the least.
    Since 1916, System institutions have operated with clearly 
defined territories. As a Government-sponsored enterprise, they 
enjoy beneficial Federal and State tax treatment, and have a 
distinct competitive advantage through their access to lower 
cost lendable funds. By abandoning clearly defined territories 
and the principle of local ownership and control, the FCA would 
undermine the essential and core principles of the System. As a 
result, the question becomes whether GSE status for the System 
continues to be appropriate.
    National Charters will for the first time have System 
institutions competing with each other. There is no credible 
justification for sending a GSE on a new and reckless course of 
internal competition. For years, our members have complained to 
Congress and the FCA about the pricing practices of the System 
institutions. We are very concerned that with National 
Charters, System institutions will engage each other in a 
disastrous round of lowball pricing that will undermine the 
financial health of rural America.
    The FCA would have Congress and the public believe that 
System institutions are shackled to an antiquated system of 
geographic territories, and that by eliminating geographic 
boundaries, the System will be insulated from regional risk. 
The truth is that System institutions have a number of options 
available that they can use to diversify their loan portfolio, 
either geographically or by commodity. System institutions 
currently have authority to lend in any part of the United 
States with the concurrence of the System institution that is 
serving the territory they wish to enter. System institutions 
may use existing loan participation regulations to participate 
in any qualifying loan made by a non-System lender.
    An examination of the proposed regulatory framework raises 
a number of public policy concerns. First, we have great 
concerns about the negative impact National Charters will have 
on small and beginning farmers as System institutions seek 
larger, more profitable loans at the expense of these 
borrowers. The FCA's National Charter proposal will primarily 
benefit, large multi-State, farm and ranch operations.
    Second, the FCA reminds System lenders that there is a 
public policy mission of the System to provide credit to all 
eligible and creditworthy customers within their local service 
area. However, the FCA proposes no specific enforceable or 
measurable regulatory sanctions that would ensure that local 
farmers and ranchers continue to have access to the Farm Credit 
System lender. In fact, they do not propose to restrict in any 
way non-local lending of System institutions. Specific 
limitations should be applied to a System institution's lending 
activities outside of their local service area.
    Third, the FCA fails to examine the increased risks that 
are associated with a local lender venturing forth into new 
territories without a solid understanding of the new region's 
peculiarities. The FCA fails to establish a case for how 
National Charters will alleviate the System's concentration in 
lending to a specific commodity. Instead of diversity in 
commodity lending, we believe that the result will be a 
continued focus on the same commodities but in other geographic 
areas, and in fact, will increase concentration and single 
commodity loan risk.
    Fourth, the proposal would fundamentally change Farm Credit 
System Institutions from the locally owned and operated 
institutions envisioned by Congress into national lenders with 
no local perspective. The participation of local farmer and 
rancher borrowers and the management, control and ownership of 
the System have always been central to its mission. The FCA 
should require that the 425,000 owners of the Farm Credit 
System vote on the question of whether their institutions 
should apply for a National Charter.
    The Farm Credit System was created at a time when there 
were limited choices to secure credit for American agriculture. 
National banks like mine did not have authority to loan money 
on farm real estate in 1916. The world has changed much since 
then. Today seed companies, equipment manufacturers, fertilizer 
producers, life insurance companies and foreign banks are all 
aggressive providers of agricultural credit. The fact that 
these options exist raises the question, why should the 
American public remain on the hook for the reckless activities 
of a retail lending, tax- advantaged GSE that has clearly 
targeted its lending to benefit large, wealthy farmers and 
ranchers.
    Given their track record of unsafe and unsound lending gin 
the past, and the lack of enforcement on the part of the 
regulator, we urge Congress to stop this process before it's 
too late.
    Thank you for allowing us to be here. I'll be more than 
willing to address any questions at the appropriate time. Thank 
you.
    [The prepared statement of Mr. Burns can be found in the 
appendix on page 76.]
    The Chairman. Thank you very much, Mr. Burns.
    I'd like to call now on Mr. Leighty for his testimony.

STATEMENT OF DALE LEIGHTY, VICE CHAIRMAN, INDEPENDENT COMMUNITY 
   BANKERS OF AMERICA; PRESIDENT, FIRST NATIONAL BANK OF LAS 
                    ANIMALS, LAS ANIMAS, CO

    Mr. Leighty. Thank you. I'm Dale Leighty, and I'm here 
today representing the Independent Community Bankers of 
America. Thank you for conducting this hearing.
    Mr. Chairman, the old perception that bankers and the Farm 
Credit System can't agree on anything is not true. We agree 
with the many FCS Associations who oppose this proposal. I ask 
that the hearing record include these sample letters of 
opposition. The bottom line is that the proposal is such a 
fundamental change with such major negative public policy 
implications that it should be thrown on the scrap pile of bad 
policy ideas.
    [The information referred to can be found in the appendix 
on page 107.]
    FCS associations express concerns that this new direction 
is a dramatic change in the FCS that would benefit only the 
large FCS lenders at the expense of the smaller ones, would 
hurt the cooperative nature of the FCS, and undermine service 
to family farmers. One Farm Credit System association wrote 
that in their Farm Credit district, a survey showed that more 
than a majority of the Associations are opposed to the National 
Charter approach.
    With such opposition, we ask, why is FCA only providing a 
30-day public comment period? The basis for much of the 
opposition to this proposal is that there is little, if any, 
need for this proposal. The System already has mechanisms in 
place, as has been mentioned earlier, to allow for customer 
choice through granting routine concurrence for borrowing and 
the use of reciprocal territory agreements, which ensures 
customers have choices.
    Also, the System can already diversify risk if institutions 
choose to use available authorities. For example, associations 
can achieve diversity both across geographic regions and across 
commodities by sharing loans with other associations, so-called 
loan participations. Loan sharing allows associations to share 
the profits or losses of their loans, and can be done anywhere 
in the U.S. Participations have the added advantage of relying 
on the local association's knowledge of the customer base, and 
various risk factors inherent in that particular geographic 
region. And they won't drive out local lenders.
    In addition, the USDA has loan guarantee programs and 
Farmer Mac has a secondary market program to purchase loans. 
Both of these are in place to help lenders reduce risks. Yet 
USDA economists report that FCS has not utilized the USDA loan 
guarantee programs to any significant degree.
    Mr. Chairman, why adopt this proposal when FCS institutions 
are currently not utilizing existing risk reduction tools? This 
proposal completely ignores other risks that result from 
venturing into unfamiliar geographic areas and climates where 
they have little, if any, previous lending experience. And why 
does it make sense for associations to compete, when competing 
associations are jointly and severally liable for each other's 
failures?
    The board of one FCA association stated, ``Risks could 
develop to such a scope and scale as to trigger losses that 
would impact the remainder of the System institutions.'' 
Another wrote, ``We have seen too often where the efforts to 
build and agricultural loan portfolio by offering low market 
rates or easy credit terms and conditions have led to problem 
loans, risky portfolios, and failed farming operations.''
    Another wrote, ``In our opinion, this is a classic safety 
and soundness issue, which puts member investment in System 
institutions at risk.'' In fact, one FCS association wrote, 
``We are convinced of the following. Safety and soundness are 
being totally ignored.''
    These legitimate concerns need to be taken seriously, Mr. 
Chairman. This proposal will hurt family farmers, not help 
them. The impacts are likely to include the need to offset low 
interest rates made to the large borrowers by higher interest 
rates to smaller farmers and reduced earnings to the 
associations and their stockholders. Also, when associations 
are forced to merge or go out of business, there will be fewer 
credit choices.
    The more profitable farmers in more profitable geographic 
areas will be targeted, because the smaller loans will not be 
viewed as cost efficient. In fact, they have pointed out that 
in those territories where there is already limited over-
chartering of FCS territories, this is precisely what is now 
occurring.
    Some FCS comments were, intra-System competition is for 
only large loans, associations are only interested in 
soliciting large, out of territory loans that have adequate 
volume to cover the extra expense of handling, and will 
contribute towards association efficiency, cost per dollar 
loaned. There will not be any competition for the smaller 
loans, as they are not cost efficient. Competition for the 
large loans will result in reduced interest rate spreads for 
these loans, and an offsetting increase on small and marginal 
loans.
    Is this the type of policy you want in place for rural 
America and for your family farmers? Is this the role you have 
envisioned the Farm Credit System playing?
    Local service area plans are insufficient. Yes, the FCA has 
said they will require local service area plans, or LSAs, to 
supposedly ensure a commitment to the Association's existing 
territories. Requiring LSAs in the first place simply gives 
credence to all the arguments against them, especially the 
arguments that National Charters will only foster cherry 
picking. Why else would LSAs be required?
    But will LSAs be sufficient? Answer: no. They are based on 
self assessments and self evaluation by the Association 
applying for a National Charter. LSAs do not require any 
targeting of young, beginning or low income farmers. So the 
focus on out of territory lending is totally geared to large 
credits. There are no requirements, no portfolio goals, for 
example, that struggling family farmers by the primary 
objective for venturing into new territories.
    Further, the policy does not increase service to low income 
farmers within LSAs by the local lender. It only requires a 
plan be in place, but provides no criteria for the plan, no 
goals, nothing measurable, meaning, business as usual. The new 
policy allows the associations to self-assess themselves, as 
part of their application, and report on how good of a job they 
feel they are doing in their local service areas.
    A few questions. Why are there no portfolio limitations on 
the amount of lending activities the associations can do 
outside of their LSAs? Why is FCA proposing local associations 
need to go outside of their district bank territories? Will 
there be transparency and open public scrutiny of these LSAs, 
or will they be hidden from the public's view? If an 
association closes down, who serves the LSA?
    Who makes up the loss of local community investment, now 
that the local association will need to divert resources to 
fight the incoming competition from non-LSA lenders? Why is 
there no requirement that the non-LSA lenders be required to 
make a financial commitment to the community where they are 
seeking loans from? Who makes up the loss to the local tax base 
when large tax-advantaged GSE privileged lenders take away 
large loans, since income taxes won't go into the local 
community?
    Will the same level of income taxes be required to be paid 
to the community where the large GSE lender is located as they 
would if made by private sector lenders? Obviously not. Does 
this mean local tax increases to maintain the tax base in these 
communities? And who makes up for the loss of local economic 
activity when funds are not recycled through the rural 
community where the borrower is located?
    One association wrote, ``Even with the LSA requirements, a 
likely result over time will be for associations to place less 
emphasis and focus on smaller, less profitable loans in 
marginal agricultural areas, and increase efforts in areas with 
stronger agricultural and larger, more profitable loans.''
    Unfortunately, the removal of boundaries could result in 
fewer associations due to interest system competition, and 
therefore lead to higher interest rates over time. Obviously 
this would not be beneficial for our customers.
    Mr. Chairman, it is inconceivable that Congress wants to 
provide less help and poorer service to family farmers. But 
both perspectives, FCAs and opposing FCS associations, can't be 
correct. They are mutually exclusive. It is a matter of basic 
economics. Family farmers will not be targeted by out of 
territory lenders under this proposal, because it will cost 
more to underwrite service and monitor their loans made from 
many States away.
    To be viable, local lenders must be able to lend to a broad 
cross section of constituents in their market. They can't be 
profitable lending only to the marginal or less profitable 
customers. But this is a prospect that many local lenders would 
face, since the large, aggressive FCS lenders would engage in 
predatory pricing to snatch away the better farm loans.
    This proposal has no monitoring or oversight controls to 
prevent predatory pricing. FCA does little policing in this 
regard currently, and this proposal only guarantees that the 
larger System entities will undercut the market to get the 
business.
    As one FCS association wrote, ``We are totally opposed to 
the removal of geographic boundaries of System entities which 
would no doubt promote predatory pricing and loss of local 
control.'' Another wrote, ``Better rates and better terms will 
only occur if one of the competing system entities is willing 
to earn less than the market would dictate. Therefore, we are 
uneasy with the proposal in this extremely competitive 
environment.''
    Section 1.1 of the Farm Credit Act, which states 
Congressional objectives, is often cited by FCA. But this 
section has a proviso which states, provided that in no case is 
any borrower to be charged a rate of interest that is below 
competitive market rates for similar loans made by private 
lenders. Yet FCA does not provide sufficient regulatory 
controls in this area to accompany their regulatory proposals. 
The Act may need legislative changes to require better 
performance. And FCA should be conducting periodic surveys of 
rates and making them publicly available.
    FCA has admitted that they have not conducted a formal 
economic cost benefit or needs analysis of the impact of this 
proposal. With such dramatic changes possible and likely, one 
would think that would be required of the FCA. This raises the 
public policy question of why small, locally based lenders, 
like our $98 million bank, should be forced to compete with a 
multi-billion dollar Government sponsored enterprise. Does 
anyone around this table believe that the remaining multi-
billion dollar GSE lenders need to keep their tax advantages 
and low cost GSE funding access in order to compete with my 
small depository institution? Is that fairness?
    Many members of Congress will talk often in the months 
ahead about our future trade negotiations with other countries, 
and will stress the need not only for free trade, but also for 
fair trade. As community bankers, we ask for the same thing: 
some basic fairness in competition in the rural credit markets.
    The Department of Treasury recently commented on this 
proposal, warning: ``First, we believe the proposal would 
reduce the focus of Farm Credit System associations, focusing 
on serving all eligible borrowers in their local areas, and 
diminish the System's local cooperative structure. Second, the 
proposal would likely allow a Government advantaged competitor 
to increase market share, which in the long term could affect 
competitiveness in Agricultural Credit Markets. We did not 
recommend National Charters or any form of interest system 
competition. It might well diminish competition and innovation 
in the medium to long term, by driving other competitors from 
the market.''
    Finally, I ask the Committee to be wary of arguments that 
FCS needs this proposal because they serve a single sector. And 
please don't believe the statements that ``FCS must continue to 
make loans to agriculture when other lenders can abandon 
agriculture in search of more profitable opportunities 
elsewhere.'' These types of statements completely 
mischaracterize this debate and our rural agricultural credit 
markets.
    FCS was given tax advantages and access to unlimited low 
cost funding as a Government-sponsored enterprise, precisely 
because they were created to serve a single sector, 
agriculture, and created at a time in the early part of the 
last century when we had credit gaps. Should FCS continue to 
receive GSE benefits if they now want to focus on largest loans 
across the country? It becomes questionable, and don't forget, 
they also get to choose who they lend to within this sector.
    A couple of years ago, FCA proposed a broad scope and 
eligibility proposal which included allowing loans to be made 
to farmers and agribusiness for both farm and non-farm 
purposes. It was modestly scaled back due to complaints. Farm 
Credit's non-ag lending already includes providing mutual 
funds, credit cards, student loans, home equity loans which can 
be used for any purpose, vacation loans, loans to dentists and 
anesthesiologists, for recreational purposes and on and on. 
This argument of being limited to a single sector has worn 
quite thin, and it is clear that FCA wants to push the expanded 
powers envelope even further in the future.
    Where will this lead with National Charters? Will Cole 
Bank, working through its direct lender associations, or will 
FCS banks and lenders form national alliances with national car 
companies to provide consumer auto financing for Ford or GM 
cars in towns of 50,000 and under population? What about 
financing all the consumer loans for Home Depot, home 
remodeling projects in rural towns? What about teaming up with 
the national businesses to provide financing for furniture 
sales, office equipment, computers, if they serve rural 
America?
    In regards to other lenders abandoning farmers, let me 
state, there are thousands of community banks serving 
agriculture. And in most communities, there are several 
community banks competing for the same business in addition to 
other competitors. Community banks are not going to go seek 
profit opportunities elsewhere by leaving our communities in 
tough times.
    Mr. Chairman, FCA and the FCS, despite all the talk about 
wanting more competition, have a terrible record for 
implementing the other financial institutions program, intended 
by Congress to allow banks, credit unions and other groups to 
access the funding windows of the FCS. Only 24 exist, despite 
decades of statutory authority. We urge FCA to host a meeting 
of OFIs to gather input and begin developing a working program.
    National Chartering is fraught with problems. It 
dramatically changes the structure of the System, will lead to 
rapid consolidation and loss of local control, encourages 
predatory pricing with no controls, will lead to large, 
aggressive FCS lenders cherry picking the best loans, with no 
specific targeting requirements to serve family farmers. It 
could lead to alliances with large commercial businesses for 
non-farm lending.
    The System has been quite profitable as it is currently 
structured, generating over $1 billion in annual net profits 
for the past decade. FCA should withdraw their proposal and 
promote options that would be much less disruptive. This 
proposal raises serious concerns. We would be glad to work with 
the Committee and the FCA in discussions to explore the needs 
of the Rural Credit Markets, especially the needs of beginning 
and low income farmers.
    But we ask that community bankers be included in such 
discussions. Otherwise, FCA is making decisions that will have 
broad impact on all lenders and borrowers in Rural Credit 
Markets, but only listening to a select few, even within its 
own constituency. And that simply can't be good for the whole 
of rural America.
    Thank you.
    [The prepared statement of Mr. Leighty can be found in the 
appendix on page 84.]
    The Chairman. Thank you very much, Mr. Leighty.
    The staff has certainly done a good job in inviting four 
very articulate witnesses, and we appreciate the testimony of 
each of you.
    Now we will hear from Dr. Peter Barry, Professor of 
Agricultural Finance, University of IL. I hope not an 
uncomfortable position, having heard this debate presently. We 
look forward to your testimony.

STATEMENT OF PETER J. BARRY, PROFESSOR OF AGRICULTURAL FINANCE, 
 CENTER FOR FARM AND RURAL BUSINESS FINANCE, UNIVERSITY OF IL, 
                             URBANA

    Dr. Barry. Thank you, Mr. Chairman and Senator, other 
members of the Committee. My name is Peter Barry. I am a 
Professor of Agricultural Finance at the University of IL, and 
Director of the Center for Farm and Rural Business Fiancee.
    Most of my career has addressed work in agricultural 
finance, including many projects and activities with industry 
groups, agency groups and policy groups. Currently, for 
example, my colleagues and I are finishing an assignment with 
the FCA about risk-based capital requirements for Farmer Mac.
    I have a long acquaintance with the National Chartering 
issue, having completed a study in 1991 for the FCA entitled 
``Competition Within the Farm Credit System: Concepts and 
Options.'' This study conceptualized the issues and identified 
options, including the currently proposed approach for intra-
System competition, with each option evaluated by a common set 
of criteria. Since it began in 1916, the Farm Credit System has 
had considerable evolution, including restructuring, new 
authorizations, contemporary management techniques, and an 
arms-length regulator. National Chartering is another step in 
this long-term modernization process.
    My testimony addresses five issues: competition, risks, 
reliability, cooperative organization and structural change, 
and regulatory considerations. Competition among System 
institutions should offer more choices for farmers and enhance 
the competitiveness of rural financial markets. Greater 
competition could especially benefit parts of the U.S., the 
southeast, the northeast, parts of the west, where historically 
strong branch banking systems generally have been less 
committed to agriculture, in contrast to the more prevalent 
community banking in the midwest and plains. Table 1 in my 
written testimony illustrates the differences in Farm Credit 
System market shares and competitive positions across selected 
States and regions.
    In going forward, the monitoring of commercial bank 
financing of agriculture will be important as bank 
consolidations continue to occur. For risks, National 
Chartering initially could bring greater uncertainties about 
unfamiliar territories and about the collection of information 
for new borrowers, thus giving value to institutional 
discipline and regulatory oversight. Over the longer term, 
geographic expansions should add to the risk-bearing capacity 
of the System institutions, perhaps yielding small reductions 
in farmers' interest rates.
    The FCS mandate for reliable lending and its cooperative 
organizations should also continue to constrain aggressive 
geographic expansion. Most farm borrowers prefer knowledgeable, 
established, reliable lenders, which implies the need for major 
institutional commitment to serving expanded territories. 
Concerns may also arise about how National Charters could 
affect younger, smaller and less wealthy borrowers. The 
dominance of the System's farm real estate lending in the past 
can skew its customer base more toward farmers who can afford 
to purchase and finance farm land, in contrast to the practice 
by younger farmers, in Illinois, at least, to lease most of the 
land they operate.
    Extensive structural change in agriculture is making it 
much harder to generalize about a customer base. As indicated 
by recent initiatives, the System seems committed to further 
serve young, beginning and limited resource farms. Structural 
change of the Farm Credit System itself has been rapid, with 
the pace of reductions of lending associations exceeding that 
of commercial banks. A patchwork structure has emerged, in that 
at least two of the large multi-State associations are larger 
than two of the Farm Credit Banks.
    The National Charter concept could facilitate or motivate 
further structural change. Perhaps it already has.
    Regarding regulations for National Chartering, the FCA's 
proposed rules published in the February 16 Federal Register 
squarely address matters of safety and soundness, local service 
obligations and effective business planning. A key 
implementation factor is for the FCA to follow through 
effectively in examinations, reporting and other regulatory 
processes, to ensure the system meets its mandated mission.
    Thank you very much for the opportunity to offer this 
testimony.
    [The prepared statement of Dr. Barry can be found in the 
appendix on page 97.]
    The Chairman. Thank you very much, Professor.
    Let me just begin the questioning by raising a point I 
think that Mr. Leighty has made, and that is that there appears 
to be some opposition within the Farm Credit System to the 
National Chartering idea. And you cited, Mr. Leighty, as a part 
of your testimony, a list of institutions that have expressed 
this. Maybe you would like to say more about that.
    But I'd like to ask Mr. Webster or anyone else to comment 
on this. What about that? Is there a debate going on within the 
System? Is the testimony we heard today from those in Farm 
Credit reflective of that, and can you make further comment or 
assertion? Then I would like to hear from the Farm Credit 
witnesses.
    Mr. Leighty. I believe you have been provided with copies 
of letters, that is the source of those comments.
    [The information referred to can be found in the appendix 
on page 107.]
    The Chairman. But I think you implied that, as a matter of 
fact, I jotted down that losses could jeopardize the entirety 
of the System, at least assertions were being made, apparently 
in some of these letters or through other testimony you've 
heard. Is that a serious concern, that the entire system could 
be jeopardized by this principle we're debating today?
    Mr. Leighty. That's simply a perspective of one of the 
commenters of the Farm Credit System Associations that sent in 
a letter.
    The Chairman. Mr. Webster, what sort of debate do you have 
within your circles on this?
    Mr. Webster. Mr. Chairman, it's interesting to have the 
bankers quote our differences, but we have them. I would say 
that the focus is on, whether we're focusing on an institution 
or the farmer-rancher. I've listened to testimony this morning 
that talks about institutions.
    We are a strong advocate of National Charters for one 
reason: it puts the choice within the American farmer or 
rancher. Let them choose who they want to do business with. And 
yes, that could challenge some institutions, because that 
farmer may choose to do business with someone who they believe 
has more expertise, better programs, maybe just somebody they 
have a good relationship with. And in fact, our association, 
which is a large multi-state, we believe with the adoption of 
National Charters we in fact will lose some customers to some 
adjoining associations. And we think that's okay.
    In fact, we think if a farmer is near one of our borders 
and chooses to have a relationship with another lender, other 
than ours, that they should not have any red tape to go 
through. They'll walk, and we'll learn from that. And we'll ask 
why they went there, what could we do to serve them better.
    The Chairman. Dr. Barry, you've sort of summarized from 
your extensive scholarship in the history of this, going from 
1916 onward, various evolutions of the System that this current 
National Chartering idea seems to be part of the flow. In other 
words, maybe I don't characterize correctly what you're saying, 
but at least potentially, a natural part of the evolution of 
the Farm Credit System. Is that true, or does this have some 
abnormal or risky qualities that are not really consistent with 
what might be sort of a secular trend?
    Dr. Barry. I think it is true with respect to what's 
happening in financial markets. The System itself in the late 
1980s allowed the banks for cooperatives to merge if they so 
chose, and operate on a national territory. Three of them did 
for a while, now there's just one. In commercial banking, we've 
seen significant breakdown of geographic restrictions on 
banking. And with a phase-in over a long period of time towards 
basically a national market now, if banks choose to participate 
in it.
    Of course, community banks still have a good niche. So as I 
mentioned in my testimony, it does seem like a natural 
evolutionary process to me.
    The Chairman. Mr. Williams, as a farmer and likewise board 
member of a bank involved in the System, you are strongly in 
favor of the rule proposal for reasons that you've stated in 
your testimony.
    Mr. Williams. Yes, sir.
    The Chairman. But as you've heard this debate, at least 
today, are there problems that you can foresee in which 
conceivably, even though this might be an advantage to farmers, 
the thoughts I think Mr. Burns suggested or Mr. Leighty, that 
the Farm Credit Administration might even have been reckless in 
terms of expansion of its activities in behalf of agriculture 
around the country, subsidized by American taxpayers generally, 
advantaged by loan differentials that were part of the System.
    Do you have any response to that idea?
    Mr. Williams. Mr. Chairman, I don't see risk for our 
association. In our district, the Tenth District, which covers 
five States, we do not see any strong opposition to it. There 
may be some associations opposed to this. I would like, if the 
Chair would allow me to, I would like to share one example of 
how a National Charter might work, and we're not speaking of a 
National Charter to go into Nebraska, where Mr. Webster is. 
We're speaking of going to an adjoining county or an adjoining 
association.
    We live one half mile from the county line. My son drives 
100-miles to our association office. He can drive 14-miles to 
another association and get the same service. Maybe we should 
be satisfied to drive 100-miles, but if he should have any 
dispute, any problems, should we be locked in forever to deal 
with that association and drive 100-miles?
    Another problem we're experiencing is we have gone from 48 
FLBAs, land bank associations, down to 16. We have formed ACAs. 
There is a spider web of territories. We're not sure where our 
territory is, because it's overlapped with other ACAs, other 
FLBAs or FLCAs. So we're already into a problem of our 
territories. We see this National Charter issue, or this 
National Charter, as a way to correct a lot of those problems 
that we're speaking about, getting authority to make a loan in 
a county that is adjoining to us.
    The Chairman. Mr. Burns, what would be wrong with that, 
letting the farmer drive 14-miles as opposed to 100?
    Mr. Burns. I would suspect, apparently there's been for 
some period of time a history within the System that 
associations that cover different territories, particularly 
that border one another, have reciprocal agreements, that if 
you or one of your customers comes to us, we can loan to them, 
if one of ours goes to you, you can go to them. I would suspect 
that Mr. Williams' son would have a choice today to drive the 
14-miles as opposed to the 100.
    One, they have to ask for concurrence from the territory in 
which they want to enter, and apparently they have to receive 
approval for that. But that system's in place already. There 
were in the comment periods that were issued both for this 
proposal and the customer choice proposal, from back a couple 
of years ago, a lot of associations that are opposed to this 
concept, in fact, the System institutions, actually made 
reference to that, and are concerned because there's already a 
system in place to address those issues. And yet, this would 
make it a national thing, expand it.
    The Chairman. Senator Crapo, would you have questions for 
the witnesses?
    Senator Crapo. Thank you, Mr. Chairman. I just have a 
couple of questions.
    It's already been noted, and the Chairman picked up on it, 
that there is some disagreement among the Associations 
themselves as to whether this rule is a good idea. And this 
question is for any of the panelists. Do we have an 
understanding about what the majority position is nationwide of 
the Associations, whether it's in support of or opposition to 
this rule?
    Mr. Williams. Mr. Webster pointed out that we do have 
Council support. We took a position some time ago on the 
National Charter issue. The Council is made up of 21 
representatives from 7 different districts throughout the 
United States, and this is a unanimous concurrence, that we 
support National Charters.
    Going back to the Tenth District at home, we had a meeting 
about 10-days ago, and our legislative officer provided an 
explanation about the hearing and what would be covered. And we 
did not hear any opposition from representatives from those 
associations in regard to a disagreement or being against 
National Charters.
    Now, I didn't say that some may not be there, but they did 
not verbalize that at the time.
    Senator Crapo. Right. If I understand you correctly, then, 
you're saying that you are not aware of what the total 
distribution is of support or opposition nationwide, but from 
your experience, you would believe there is support?
    Mr. Williams. Support, yes, sir.
    Senator Crapo. Anybody have any other information or data 
on that?
    All right. Well, the only other question I have right now 
is for you, Dr. Barry. You've heard the argument made here that 
one of the things that's probably, or that may happen as a 
result of this proposed rule is that you will see internal 
competition among the associations, and that the larger, more 
well-financed associations will go in and cherry pick the good 
loans in the other areas, resulting in driving, at least as I 
understand the argument, driving those who are not as well-
financed out of business, and actually impacting competition in 
a negative way.
    Could you comment on that argument?
    Dr. Barry. Well, it's a valid question to raise. As I 
indicated, I think there's enough safety mechanisms in place as 
competition might expand to protect against those kinds of 
things happening. Again, many farmers prefer to develop good 
relationships with lenders, and to be known and have their 
business understood well, whether they are small, medium, or 
very large.
    And so to the extent cherry picking might happen, that 
would probably result in a natural migration of borrowers to 
lenders to whom they really want to do business with, and to 
have the flexibility to do that.
    Mr. Webster. May I address that, Senator?
    Senator Crapo. Certainly.
    Mr. Webster. We've got to remember that we are controlled 
by a board of directors that are farmers and ranchers from our 
territory. They're not going to look kindly upon their 
institution pricing products differently several States away 
than they're getting locally. We see that as something that's 
been thrown up. In fact that just will not happen very well. If 
it does happen, the controls are in place. Clearly our board of 
directors would be very concerned about that practice, and it 
would not be condoned within our entity. And I think it would 
not be condoned elsewhere.
    Mistakes could be made. But I can't envision a practice of 
doing that, that could gain the support on an ongoing basis 
from a local board of directors. In fact, our capital was 
raised in Iowa, Nebraska, South Dakota and Wyoming. If we have 
a National Charter, I can assure you, the primary emphasis of 
the use of that capital will be Iowa, Nebraska, South Dakota 
and Wyoming.
    Senator Crapo. Thank you. I have no further questions, Mr. 
Chairman.
    The Chairman. Well, thank you very much, Senator Crapo.
    This is not a question that any of you can answer, but I 
will raise it for this comment period. Earlier, Congressman 
Leach indicated that the incoming Administration of President 
Bush had asked that we go slow on additional rulemaking until 
the Administration had some opportunity to sort out all of the 
attempts at rulemaking or regulations that were made during the 
last few weeks of the last Administration.
    This is neither here nor there with regard to the merits of 
what we're discussing today. Nevertheless, we are in that 
milieu of a good number of regulations, some of them pertaining 
to agriculture, forestry and other things we're interested in, 
and which those who are coming into authority, sometimes 
slowly, because the nomination and confirmation process takes 
some time with a new Administration.
    This idea that we have today is, has been suggested 
historically, not an entirely new one, but nevertheless, this 
is a significant rule. One reason that I asked the Board 
members, Mr. Reyna and Ms. Jorgensen, to participate in a 
hearing on this, even though the public as a whole may 
participate for 30-days, is really to elevate the issue and its 
timeliness, so there would be opportunity for those to offer 
this testimony, which you have, and which others may be 
stimulated to do, having heard you.
    Now, that is not a reason why the rule is either good, bad 
or indifferent. But it may very well be that other departments 
of the Government, as they have competent people coming to 
those desks and those responsibilities, will want to make a 
comment. I have at this point no testimony, say, from the White 
House or the Department of the Treasury or other relevant 
people who sometimes have things to say about rules. But that 
may come forward, and if so, we will try to publicize that, so 
that will be a part of the overall consideration of those who 
are taking part in the hearing today.
    I would ask staff of Senators who have not been able to 
attend to be certain that the testimony of each one of you, the 
full record of the hearing we have to date, long before it can 
be officially published, be put in the hands of those Senators, 
so they will have the same benefit, at least, of your written 
testimony. And staff, I know, will ably give some gist of the 
conversation we had and the questions and answers.
    Do any of you have a final comment? If so, I would 
certainly entertain that.
    If not, I express the appreciation of all of us to you for 
coming, some of you at long distance and inconvenience, to be a 
part of this hearing. I think it's been an important one, and 
we've had very good sharing of views.
    The hearing is adjourned.
    [Whereupon, at 11:59 a.m., the Committee was adjourned, to 
reconvene at the call of the Chair.]
      
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                            A P P E N D I X

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                           February 26, 2001



      
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