[Senate Hearing 109-800]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 109-800

  TO REVIEW UNITED STATES DEPARTMENT OF AGRICULTURE FARM LOAN PROGRAMS

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

                                HEARING

                               before the

                       COMMITTEE ON AGRICULTURE,
                        NUTRITION, AND FORESTRY

                          UNITED STATES SENATE


                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION


                               __________

                             JUNE 13, 2006

                               __________

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


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

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           COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY



                   SAXBY CHAMBLISS, Georgia, Chairman

RICHARD G. LUGAR, Indiana            TOM HARKIN, Iowa
THAD COCHRAN, Mississippi            PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            KENT CONRAD, North Dakota
PAT ROBERTS, Kansas                  MAX BAUCUS, Montana
JAMES M. TALENT, Missouri            BLANCHE L. LINCOLN, Arkansas
CRAIG THOMAS, Wyoming                DEBBIE A. STABENOW, Michigan
RICK SANTORUM, Pennsylvania          E. BENJAMIN NELSON, Nebraska
NORM COLEMAN, Minnesota              MARK DAYTON, Minnesota
MICHEAL D. CRAPO, Idaho              KEN SALAZAR, Colorado
CHARLES E. GRASSLEY, Iowa

            Martha Scott Poindexter, Majority Staff Director
                David L. Johnson, Majority Chief Counsel
              Vernie Hubert, Majority Deputy Chief Counsel
                      Robert E. Sturm, Chief Clerk
                Mark Halverson, Minority Staff Director

                                  (ii)


































                            C O N T E N T S

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                                                                   Page

Hearing(s):

To Review United States Department of Agriculture Farm Loan 
  Programs.......................................................     1

                              ----------                              

                         Tuesday, June 13, 2006
                    STATEMENTS PRESENTED BY SENATORS

Chambliss, Hon. Saxby, a U.S. Senator from Georgia, Chairman, 
  Committee on Agriculture, Nutrition, and Forestry..............     1
                              ----------                              

                               WITNESSES
                                Panel I

    Keppy, Glen, Associate Administrator for Programs, Farm 
      Service Agency, Washington, DC, accompanied by: Carolyn 
      Cooksie, Deputy Administrator for Farm Loan Programs.......     2

                                Panel II

    Everson, Dennis A., President Agribusiness Division, First 
      Dakota National Bank, Yankton, South Dakota................    13
    Krub, Karen, Farmers' Legal Action Group, Inc., St. Paul, 
      Minnesota..................................................    17
    Senter, Elisabeth B., National Association of Specialist, FSA 
      and National Association of Federal Managers, Gregory, 
      South Dakota...............................................    15
                              ----------                              

                                APPENDIX

Prepared Statements:
    Harkin, Hon. Tom.............................................    26
    Everson, Dennis A............................................    27
    Keppy, Glen..................................................    38
    Krub, Karen..................................................    50
    Senter, Elisabeth B..........................................    60
Questions and Answers Submitted for the Record:
    Coleman, Hon. Norm...........................................    74




























 
  TO REVIEW UNITED STATES DEPARTMENT OF AGRICULTURE FARM LOAN PROGRAMS

                              ----------                              


                         TUESDAY, JUNE 13, 2006

                                       U.S. Senate,
         Committee on Agriculture, Nutrition, and Forestry,
                                                    Washington, DC.
    The committee met at 10:05 a.m., in room SR-328A of the 
Russell Senate Office Building, the Honorable Saxby Chambliss, 
Chairman of the committee, presiding.
    Senators present: Senators Chambliss, Coleman, Thomas, 
Talent, Crapo, Harkin, Nelson, Salazar, Baucus.

STATEMENT OF HON. SAXBY CHAMBLISS, A U.S. SENATOR FROM GEORGIA, 
  CHAIRMAN, COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

    The Chairman. This hearing will now come to order. Good 
morning.
    Our hearing is going to examine the Farm Service Agency's 
Farm Loan Programs. The Federal Farm Loan Programs are an 
important source of temporary credit to help farmers get into 
the business or recover from a natural disaster or other 
setback.
    The purpose of this hearing is to ensure that programs are 
operating in a safe and sound manner and that FSA is providing 
strong financial management, all the while meeting the needs of 
producers. There have been $3.8 billion in lending authority 
each year. It's also imperative that this Committee conduct the 
necessary oversight to ensure the program is well managed and 
protects farmers.
    Since 1996 Congress and the Administration have worked to 
improve farm loan programs. Just 5 years ago they were taken 
off the Government Accountability Office's high risk list.
    Years of well-intentioned but financially unsound policies 
and practices--some directed by Congress, I admit--landed them 
on that list. A serious effort that began with the 1996 farm 
bill has been successful. I sincerely hope we never again see a 
time when farm loan programs are considered high risk.
    I would also like to express my appreciation to the Farm 
Credit Council and the Independent Community Bankers of America 
for being willing to submit testimony for this hearing. Due to 
time constraints we're not able to accommodate everyone who 
wished to testify. Please be assured that all submitted 
testimony will be given the same consideration as that offered 
orally today.
    We're going to have two panels this morning. Our first 
panel consists of Mr. Glen Keppy, Associate Administrator for 
Programs for the Farm Service Agency here in Washington. He is 
accompanied by ms. Carolyn Cooksie, Deputy Administrator for 
Farm Loan Programs.
    Mr. Keppy, Ms. Cooksie, welcome to you this morning. We 
appreciate you coming and taking the time to shed some light on 
what's been happening at USDA relative to these very valuable 
programs. We look forward to your testimony. And I will turn 
the floor over to you at this time.

 STATEMENT OF GLEN KEPPY, ASSOCIATE ADMINISTRATOR FOR PROGRAMS 
 FOR THE FARM SERVICE AGENCY, ACCOMPANIED BY CAROLYN COOKSIE, 
          DEPUTY ADMINISTRATOR FOR FARM LOAN PROGRAMS

    Mr. Keppy. Thank you, Mr. Chairman.
    Members of the Committee and Staff, thank you for the 
opportunity to review the current state of the Farm Service 
Agency's Farm Loan Programs at the Department of Agriculture. 
This is my rookie hearing on the Hill as Associate 
Administrator for Programs at FSA. And unlike my playing days 
on the field with the Pittsburgh Steelers and Green Bay 
Packers, I'm pleased that we're not opponents and hope there 
won't be any hard hits.
    The Chairman. You didn't ride a motorcycle here, did you, 
Mr. Keppy?
    [Laughter.]
    Mr. Keppy. No, I didn't. I did learn something.
    FSA's Farm Loan Program is a success story. We make direct 
and guaranteed farm ownership and operating loans to family 
size farmers and ranchers who cannot otherwise obtain 
commercial credit from a bank, Farm Credit System, or other 
lenders. Our current portfolio includes $5.4 billion in direct 
loans and $8.7 billion in guaranteed loans.
    The quality of our portfolio has improved significantly. 
Here are just a few of our highlights.
    Losses in our direct loan program have dropped down to 3.6 
percent. That's the lowest level in 20 years. Losses in our 
guaranteed loan program are less than one-half of one percent. 
That's the lowest in 10 years. The delinquency rate for direct 
loans is 9.3 percent, and 1.67 percent for guaranteed loans--
again the lowest in 10 years.
    Last year we graduated 3,611 borrowers out of FSA loans and 
into commercial credit. The direct loan case load to beginning 
and SDA farmers has more than quadrupled from 1995 to 2005. The 
guaranteed loan caseload has more than doubled from 1997 to 
2005.
    FSA continues to help minority farmers in proportions 
greater than the demographic percentages of the total farming 
population. And we remain committed to small farmers in 
America.
    Research at the University of Arkansas studying FSA direct 
loan originations during fiscal year 2000 and 2003 found that 
92 percent of direct loan originations went to small farmers 
who had less than $250,000 in gross sales. They also determined 
that 78 percent of FSA's direct loans originated between 1994 
and 1996 have already been paid off.
    Our rear-view mirror is filled with success stories.
    But our attention is clearly focused on the challenging 
curves up ahead.
    Term limits in the present statute place quantity 
restrictions for direct operating loan borrowers. That means 
7000 borrowers have 1 year of eligibility and 11,000 borrowers 
have 2 years left.
    Direct farm ownership and operating loan limits were capped 
at $200,000 more than 20 years ago. No adjustment in two 
decades. Considering the rising cost of farmland, energy, and 
other operating expenses, can farmers fully finance their 
credit needs today?
    The Federal work force is getting older. As many as 25 
percent of the current FSA loan officers will be eligible to 
retire within 3 years.
    Through modernization, the focus on farmers and meeting 
farm loan program objectives, each enhanced by the hard work 
and dedication of FSA employees, we have made great strides in 
performance improvement. Using our new farm business plan FSA 
borrowers are now processed through a real time web based 
system. We have reduced direct and guaranteed loan application 
processing time by almost 22 percent. And we have developed the 
Farm Loan Program risk assessment program, which provides risk-
based oversight to the areas of potential concern within our 
portfolios and can now easily be identified.
    Thanks to having the rural delivery system coupled with the 
dedication and hard work of an existing team of experienced 
loan officers, FSA is well positioned to continue the high 
quality delivery of loan program initiatives to qualified 
American farmers.
    We look forward to working with this committee so that 
together we might strengthen the livelihood of family farmers 
while ever improving reliability of rural America.
    Thank you for your attention. Because I'm a rookie and I 
have a veteran sitting next to me here, Carolyn, we will answer 
questions back and forth. Thank you.
    [The prepared statement of Mr. Keppy can be found on page 
38 in the appendix.]
    The Chairman. We recognize the expertise in Ms. Cooksie. 
We're pleased to have you here.
    I know you've only been on the job for a few short weeks. 
I'll have to say that what you just reported to us and what's 
in your testimony is good news, particularly for folks like me 
who, frankly, have been very skeptical about the ability of the 
Federal Government to make direct loans. We've always had a 
default rate that far exceeds the default rate in the private 
sector. And there are some valid reasons why there should be a 
higher rate on direct loans in the private sector.
    But this is the tax-payers' money. And you tell us now that 
the default rate is down to 9.3 percent. That's about 3 percent 
better than what we saw 5 years ago. And when the loss ratio is 
down to 3.6 percent, that's pretty significant and it does mean 
that we're doing a much better job both in making the loans 
plus collecting the loans.
    So I'm pleased to see that kind of progress.
    This also says that the current farm bill is working 
because farmers are able to generate income from the market 
that allows them to pay the loans back, which obviously we're 
always glad to see.
    First of all, in Section 5301 of the 2002 Farm Bill there 
was a provision that I included in that Farm Bill that requires 
two studies of the direct and guaranteed loan programs. Both of 
these studies should have been delivered to us by now. One of 
them was due only last month. But we haven't received either 
one of them. When can we expect these studies?
    Ms. Cooksie. Mr. Chairman, good morning.
    We have draft copies of the studies and we can hopefully 
give them to you shortly. One of the problems that we had with 
the study, the first one covered a period of May 13, 2003 to 
May 13, 2004. When we started the study we realized that having 
only 1 year to do a study, you're not going to get any 
meaningful information out of 1 year because most of the loans 
are due on an annual basis and they would be coming due during 
that period of time.
    And then the second study is over another year period, a 
couple of years, 3-year period. What was decided to do was to 
go out with two studies again and do a study over a 5-year 
period into 2005. So we started 2000 to 2004. This resulted in 
a longer time for completion.
    The other problem we had, of course, is due to budget 
constraints. We've had to do that particular study in- house. 
So it just took longer than it should have.
    But we have a draft of the two reports, the combined 
reports. We've seen the draft and passed the draft back and 
forth. We've had to go through the department clearance. 
Hopefully, within the next 45 days or so you should be getting 
a copy of the report.
    The Chairman. Thank you.
    Mr. Keppy, in your testimony you discussed how NSA is using 
or transitioning to electronic and web-based systems for loan 
processing and financial analysis. Would you please describe 
the types of internal and external controls in place to fix 
sensitive borrower and agency information? I don't ever want to 
see or hear that this agency has a problem like the Department 
of Veterans' Affairs. That's the reason for my question.
    Mr. Keppy. I couldn't agree more with you.
    The first thing that the new technology does is does away 
with paper copies. And I think the safeguards are in place to 
make sure that the electronic transactions are safeguarded 
against, as much as humanly possible, against the kind of thing 
that we've seen happen. The loan officer will have a much 
better understanding of the situation that the borrower has 
gone through, his strengths and his weaknesses.
    This will be available 24/7. So it's something that 
desperately is needed to make sure that we're operating in the 
kind of situation that we need to be today.
    The Chairman. I note that you have a lot of experience in 
FSA today relative to the making of loans under our different 
programs. But I know also that there will be a drain on that 
experience over the next several years.
    Do you have a human capital management plan in place to 
ensure that FSA employees receive the necessary training and 
the agency has a pool of talent to call upon for its management 
positions?
    Ms. Cooksie. We do have a human capital management plan in 
place. We work it every day. No. 1, we have a two- year 
training program for any trainee who comes into the agency as a 
loan officer. They have to go through the training through this 
training program. It takes 2 year as a matter of fact, I think 
many associations will tell you.
    Human capital is one of our biggest issues right now. And 
you saw between 25 and 28 percent of our loan officers over the 
next few years are eligible for retirement. Our stats show 
they're not working much past retirement.
    With the human resource budget that we've had, which has 
gone down, it's really a problem for us that we are able to 
keep our employees because it takes years to train a loan 
officer. We don't have the resources to put them in the 
pipeline as early as we need to to take care of retirement and 
attrition.
    But under the new capital plan one of the things we're 
doing now under the leadership of Bill Glasser, who is the 
Administrator, we have 30 FTEs which we got in the 
appropriation bill last year. And we're going to use those as 
FTEs until the person gets trained; then they'll be absorbed 
into their ceiling, and then we will roll that back out to 
other states to use. That's not a lot of FTEs given the human 
capital needs that we have and for attrition. But it's 
certainly a step in the right direction.
    We've got a recruiting plan for when we do have positions. 
We've got diversity plans for when we do have positions. We do 
have diversity in our hiring so we do have a pretty extensive 
human capital plan. The Chairman. That's the average time to 
complete a settled loan that goes into foreclosure? How does 
that compare to the private sector?
    Ms. Cooksie. I doubt that it does compare to the private 
sector. The 1961 statute gives the farmers tremendous appeal 
right. They can appeal anywhere from three to 5 years. I don't 
think we probably do compare to the private sector on servicing 
because we just have a lot of statutory requirements and rights 
that the farmer has, and that as far as I'm aware, nobody else 
in that lending market offers.
    So I'd say we're a lot lengthier than the average lender 
out there.
    The Chairman. How long has that process been in place?
    Ms. Cooksie. 1950? Before I took the job in 1996. It's been 
at least 20 years.
    The Chairman. It's something maybe we ought to look at next 
year as we move into the farm bill.
    Ms. Cooksie. I think there are places where we need to look 
at to see if it makes sense in today's world to keep it in 
there.
    The Chairman. While we're talking about that, I know we 
have a $200,000 cap. Is that something that in the opinion of 
USDA we're going to need to take a look at?
    Ms. Cooksie. Absolutely. That has not changed in over two 
decades.
    Farming has changed tremendously; prices have changed 
tremendously. 200,000 in some of the production out there will 
not give very much. So there's no doubt that we need to look at 
that.
    The Chairman. What analysis has FSA done on the proposed 
fee increase for the guaranteed loan program and how much more 
will borrowers pay on the average?
    Ms. Cooksie. We did a pretty extensive analysis on what it 
would mean to the farmer and how much the percentage--the half-
percentage rate increase would mean. And we did it based on an 
average loan size, 8 percent interest.
    We did a 5-year term on an operating loan and a 20-year 
term on a real estate loan. And for an operating loan the 
increased payment will be $464,000, averaged about $185 pre 
farmer. For real estate, based on an average loan amount of 
297,000 it's going to be about $136. The line of credit which 
they will pay every year is slightly different. The first year 
it will be about $738 for 1 year, and from two to 5 years it 
will be a little over a thousand dollars.
    So we did a pretty sensitive analysis of what that would 
mean as an end-result to the farmer.
    The Chairman. Is it your intention that these programs be 
funded exclusively through fees in the future?
    Ms. Cooksie. We've been told that that is what the 
department thinks the result will be at some point.
    The Chairman. According to media reports a recent lawsuit 
and settlement in Oklahoma of the interest rate charged to a 
farmer in violation of FSA's average agricultural loan customer 
rules could force commercial banks to leave the guaranteed loan 
program. Do you think this is a real concern?
    Ms. Cooksie. I am concerned. Any time one of our lenders 
has this kind of a problem we are concerned.
    We think that the overwhelming majority of the more than 
2400 lenders that we deal with through the guarantee program 
are charging the correct interest rate and are not going to 
have a problem. But we are concerned about what's going on in 
Oklahoma. I hope that the end result is that if we see that 
bankers are not willing to use the program I think that could 
be an interim result of it.
    The Chairman. The University of Arkansas study that's been 
mentioned on the effectiveness of the direct loan program 
indicates that FSA is reaching beginning and socially 
disadvantaged farmers. Please describe the Agency's outreach 
effort to capture these farmers.
    Ms. Cooksie. We've really gone through a tremendous effort 
enrolling socially disadvantaged applicants, which is by 
definition women and minorities all over the country. We've 
done a couple of things.
    One of the things we've done is we've given the states 
goals for SDAs. They have to reach certain goals every year, 
and that's part of their performance plan. Each state has a 
number based on national averages that they're supposed to 
reach. And we tie that really closely with their annual 
performance plan. We monitor the treatment of SDA applicants 
more than we do most anybody else.
    The states capture at least, or report to us on 50 percent 
of the withdrawn and rejected applications that they get in the 
SDA category. We initiate responses that provide all applicants 
with written confirmation of all applications. We really have 
done an all-out effort to do outreach, and the numbers are up 
tremendously.
    The Chairman. Very good.
    Senator Harkin. 
    Senator Harkin. Mr. Chairman, thank you very much. I 
apologize for being a little late.
    I want to welcome Mr. Keppy here, a long time friend and a 
great family farmer in Iowa, and one of our leaders in pork 
production. Of course, Iowa leads in pork production. And he's 
been a long-time leader in that area and I'm just delighted to 
see you and welcome you here to your first appearance before 
this Committee.
    I'll just ask that my statement be made of the record.
    [The prepared statement of Hon. Tom Harkin can be found on 
page 26 in the appendix.]
    The Chairman. Without objection.
    Senator Harkin. I just want--One thing I want to bring up 
here with you, Glen and Ms. Cooksie, is the idea of what 
happened when we move more and more money--Maybe we've already 
asked this question--but when we move more and more into the 
guaranteed loans for operating lines of credit. What's going to 
happen? How many farmers will be unable to cash-flow these 
higher loan rates?
    We're talking about more fees, higher fees. Has FSA 
estimated the number of producers who will be unable to cash-
flow at these higher loan fees? And, on the other hand, in the 
course of that will the FSA be able to assist these borrowers 
through either subsidized guarantees or direct loans? In other 
words, how many--Do you have any estimate of how many, because 
of these higher fees, will not cash-flow?
    Ms. Cooksie. I don't think that we can estimate how many 
are not going to be able to cash-flow. As you know, the farmers 
come in and every year their plan changes. So it's hard to 
figure out until they get in and they give us a business plan 
for us to figure out what their cash-flow is.
    But having said that, I think the first year, especially on 
the line of credit, it's not going to be that tremendous.
    What I have a concern about is the out years on the line of 
credit and the fact that on the line of credit they have to pay 
that guaranteed fee every year, which is going to be a 
tremendous burden on farmers. So I think the first year they'll 
probably be able to make it and they'll be able--I just gave 
some figures before you came in on lines of credit on the 
average loan. The first year it will be about $738, and in the 
out years it will be over $1100 a year.
    But in dealing with the farmers and their cash-flow and 
margins that we deal with, that does make a huge difference to 
some farmers, that amount of money. So some of them, I think 
this first year they'll be OK. In the out years I think some of 
them may have a problem. And we will have to see if the 
guarantee does not cash-flow if we can absorb them into the 
direct loan program.
    The Chairman. If I can interrupt just a minute. Tell us 
what you mean by that. You talked earlier about the two to 5 
year operating loan. How does the normal operating loan work 
for a farmer that comes in. Is it a 1-year loan? Does he get a 
loan every year? Two to five years? Explain how that works.
    Ms. Cooksie. Some of them only have to get operating loans 
every year. Some of them are one, five, and seven years, 
depending on the operation and their production cycles.
    The Chairman. What you're saying to Senator Harkin is that 
if somebody has a 5-year operating loan, let's say, and it's 
$200,000 a year, even though they come in and they present 
basically the same plan every year or maybe some small 
variation of the same plan every year, they're going to pay 
that fee all of those years, not just the first year.
    Ms. Cooksie. If they have a continuing line of credit with 
us, yes.
    Senator Harkin. It wouldn't have to be a new loan; it's the 
same number every year.
    [Pause.]
    I'll have to think about that.
    The other thing is I read your testimony, Glen, about the 
performance of the guaranteed and the direct loans. It was 
good. It looks very nice, very good. It raises a question.
    Is FSA turning away some marginal farmers, smaller farmers, 
to keep losses so minimal? In other words, are we playing it 
too safe?
    Mr. Keppy. I'm going to turn that over to Carolyn. But my 
answer would be yes, we use prudent information in the 
discussion. But we are doing what we can to make sure that the 
people that need these loans are getting them.
    Carolyn, you've got some facts and figures.
    Ms. Cooksie. I think the answer to that is that I'm not 
sure. It is a struggle because it is a balancing act between 
which farmers you can help and which ones you can't.
    Before credit reform when we had tremendous loss rates and 
the interest rates were higher, there wasn't that much impact 
on the program itself. After credit reform our delinquency rate 
and our loss rate started to reflect that. So if we have high 
delinquency rates and high interest rates it hurts every farmer 
in the country who wants access to this program because we 
don't have the money for their loans.
    On the other hand, in this program low interest rates and 
loan loss rates aren't the only things you have to worry about. 
So it's a balancing act.
    I think we aren't turning away farmers who clearly need the 
program in connection with cash-flow. Because of the statute we 
can't turn them away. But it is a balancing act that we go 
through all the time.
    Now if you think about that, quite frankly, on the one hand 
we see the lower number and we work toward that. On the other 
hand we worry that sometimes we don't reach all the farmers 
that we need to reach. But on the other hand, there's a margin 
there that you have to say no.
    Senator Harkin. What kind of data do you have to show over 
the last several years the percentage who have applied and are 
turned down?
    Ms. Cooksie. We have that data.
    Senator Harkin. Could you supply me that data? I'd 
certainly like to look what it's like over the last ten years 
or so.
    Ms. Cooksie. We have data on how many applied and how many 
were rejected and how many were withdrawn.
    Senator Harkin. It would be interesting if you would break 
that down by state.
    Ms. Cooksie. We'll do it for you.
    Senator Harkin. One last thing. We had some crop losses 
last year in southeast Iowa, a pretty tough drought situation 
down in your area and a lot of farmers applied for emergency 
loans and were not qualified. And a lot of them were turned 
away. And there was a lot of conversation about that.
    Again data: Do you have data on the number of emergency 
loan applications that were denied over the last several years?
    Ms. Cooksie. I think we do. We have data on each 
application as they file it. And we can break that down into 
emergency loans, yes.
    Senator Harkin. One last thing. Ms. Krub's testimony--she's 
on the next panel--I've read her testimony. She claims that FSA 
has a lax attitude on borrower's rights. She states in her 
testimony that: ``Agency decisionmakers are increasingly 
missing statutory deadlines for making determinations on loan 
applications and loan servicing requests.''
    I want to get your response to that.
    Ms. Cooksie. I'm a little surprised to hear that. Our 
application process times are overall down 22 percent.
    Senator Harkin. Are down?
    Ms. Cooksie. 22 percent overall.
    The statutory deadline for processing the application is 60 
days. The regulations that we put out to the field offices 
basically tell them they have 30 days. We're doing it in about 
12 and a half right now.
    So we're well below not only the statutory deadline but 
well below the regulatory deadline. We work on it every year. 
As a matter of fact, that's one of our goals that we give to 
the field offices at of the performance plan, how long it takes 
to process an application.
    Senator Harkin. You're saying you have it down to 12 days?
    Ms. Cooksie. 12 and a half days, national average.
    So I think we've made great strides in that. Are there 
isolated instances of almost everything? Because of our 
portfolio, which is so large, probably so. There are anomalies 
out there all the time. But our national averages don't show 
it.
    We pretty much know when people are missing deadlines and 
we can monitor that, and we do monitor it, not only on our 
application processing times but we're getting ready to do it 
on things like the 951(s) and all the other sorts of items out 
there.
    I think we are getting much better at that. And I don't see 
overwhelmingly nationwide we're missing deadlines.
    Senator Harkin. Thank you very much.
    Thank you, Mr. Chairman.
    The Chairman. Senator Salazar.
    Senator Salazar. Thank you very much, Chairman Chambliss, 
and Ranking Member Harkin.
    Let me just say at the outset that I appreciate the work 
that the Farm Service Agency does. I remember a long time ago 
when I was a beginning farmer going to the FHA and receiving a 
loan that allowed me to get a 320 acre operation down in 
southern Colorado, and working with the agency director and 
going through the process of the whole application. And you 
continue to do good work to help people get started.
    I have three questions. One is in the area of direct 
emergency loans, in terms of the $500,000 in direct emergency 
loans.
    But if you look at what's happening across the country in 
agriculture, particularly in my state today, I think we're 
going to see many farmers, in large part because of the weather 
and related circumstances we find ourselves in in Colorado--we 
went through the driest year on record about 5 years ago and 
this year was going to be second to that year--so we've been 
having lots of problems, I can tell you. I was wondering where 
the Agency, what you expect to happen during this farming 
season relative to applications for direct emergency loan 
assistance, and whether you are prepared to respond to these 
requests.
    Ms. Cooksie. We are absolutely prepared. No. 1, we had a 
carryover from several years ago, fully enacted funding to take 
care of most of the ones this year.
    When a state gets emergency requests and they're 
overwhelmed by the volume we have what we call our jump team to 
go into states to help process applications that they can't 
handle in a timely manner. So I think we're poised to handle 
emergency applications that we have even if we have somewhere 
where we have a great influx of them all at one time.
    Senator Salazar. When you talk about the carryover from the 
past, what leads you to the conclusion that we have enough 
money?
    Ms. Cooksie. We've got right around $140 million right now, 
somewhere in that ballpark, that we can extend this year.
    Senator Salazar. $140 million for emergency loans?
    Ms. Cooksie. Emergency loans nationwide.
    Senator Salazar. And from your point of view that will be 
enough to cover the requests that will come in during the 
summer and fall?
    Ms. Cooksie. Yes. Our fiscal year ends September 30th, so 
we're in good shape for this fiscal year. September 30, then we 
start another budget year. Most of that money that is not used 
this year is carried over to the next fiscal year. So we'll 
just carry it over. I think we have adequate funds to handle 
the requests.
    Senator Salazar. Following up on a question that Senator 
Chambliss asked on the loan limits, I think in your testimony 
you talked about the $200,000 ownership loan limit as well as 
the $200,000 direct operating loan limit.
    What's your recommendation of what kind of adjustment we 
should make with respect to those limits?
    Ms. Cooksie. We are looking at that right now. The 
Secretary as you know, has spent hearing sessions on farm bill 
items so we're in the process right now of figuring out what 
those items are and what recommendations are going to be on 
that. We're either going to recommend that each level like OL 
and FO get bumped up or we will ask for some overall level.
    And you don't just say you have this much for operations, 
this much for ownership. It's a combination of both. But I 
don't think a decision has been made yet on how much the 
recommendation is going to be.
    Senator Salazar. In your testimony you also describe the 
subjectivity related to the definition of family farmer. I 
think you speak about it by saying that we need to move away 
from the more subjective definition of a family farm and 
develop more objective definitions related to the farmer's 
filing with--the annual tax return and the like.
    Explain what the problem is here that you're trying to 
address there and what the recommendation is that you are 
trying to move to as a more objective determination.
    Ms. Cooksie. The simple answer is that we're just trying to 
figure out what the heck a family farm is so that statutorily 
we may call it a family farm. And we don't know what that is. 
It's different where I'm from in Kentucky than it would be from 
Georgia or Montana. It depends.
    So one of the problems that we're having is to confirm a 
little bit figuring out what that actually is and trying to 
quantify that so that we can make sure that we're within our 
defined definition in the statute of the family farm.
    But we found out about a year ago, we tried to do a 
proposed rule on the definition of a family farm. We got 1600 
comments and they were all different in what they thought a 
family farm was. It was a problem and it continues to be one. 
Until we have a definition we'll have to struggle with that.
    Senator Salazar. What would your proposal be relative to 
how we should define a family farm as we look at the rewrite?
    Ms. Cooksie. I found out from the proposed rule that I 
don't really have a proposal. I just know that we don't have a 
conclusion on what a family farm is nationwide. Senator 
Salazar. Mr. Keppy, do you have a response to that question on 
how we define a family farm?
    Mr. Keppy. In the pork-producing world anybody that has one 
more sow than I is a large farmer.
    [Laughter.]
    Mr. Keppy. That's an issue that good luck on because it's 
going to be tough to come up with. But I am willing and we are 
willing as a Department to work with the people on the Hill to 
come up with a workable definition.
    Senator Salazar. Thank you, Mr. Chairman.
    The Chairman. Senator Talent.
    Senator Talent. Thanks, Mr. Chairman. I appreciate your 
holding hearings and the ranking member, and I appreciate your 
service.
    Let me go on a little bit on your proposed changes. Let me 
just say right up front, I've seen guaranteed loan programs 
work well in a lot of different contexts. And I'm very 
concerned that your proposal is going to have the effect of 
marginalizing the program; just basically so reducing access to 
it that it would defeat the purpose of it. So let me get to the 
heart of that.
    You are proposing increases in fees of 150 percent, to I 
guess as much as three or four times what they now are. I sent 
a letter to you all signed by a number of senators pointing out 
the problems and asking you why you were doing that. And I got 
the response that you were responding to a budgetary necessity 
because of the problems with the operating deficit.
    Are you all saying that this is a budget-driven kind of 
change?
    Ms. Cooksie. Absolutely we would say it's budget- driven.
    Senator Talent. Let me just say to you then, Congress 
determined in the last farm bill that we wanted to move in this 
direction to take pressure off the direct loan program to help 
sustain the family farming sector. The guaranteed loan program 
reflects I think that statutory judgment about how best to 
balance the needs of the farming community for a hedge against 
low commodity prices, disasters, et cetera, with the concerns 
to protect the tax-payer as well.
    When you make a proposal for a change of this magnitude it 
seems to me that the effect of it is to defeat the balance 
Congress was trying to structure. Your job is to execute the 
laws, not to try and change the laws in the guise of a 
budgetary proposal.
    Do you have any comment?
    Ms. Cooksie. We only charge presently a 1-percent fee. The 
proposed rule that's out right now changes both operating and 
farm ownership by half a percent. So it will go from 1 percent 
to one and a half percent. Then we put in a new line of credit.
    Senator Talent. It's pretty devastating, really. 75 basis 
points per year for operating lines of credit. I presume that 
this was on instruction from the Office of Management and 
Budget.
    Let me say, Mr. Chairman, I chair the Small Business 
Committee. We encounter this every year. Only we have the 
foresight to put into the statute that they couldn't make these 
changes without Congressional approval. I would just strongly 
urge the Committee that that's a change we need to make in the 
next farm bill. I might also suggest, Mr. Chairman, that since 
it's clear to me that in this whole area of guaranteed money-- 
not just the farms but small business--that the Office of 
Management and Budget is driving the policies. We ought to have 
them down here. These folks can't answer these questions. And 
they've been very honest and I appreciate their candor. It's a 
budget-driven thing. It's not something they would have done 
except they were told to d it.
    We ought to get representatives from OMB down here who are 
driving this and ask them what they're doing to protect the 
American farmer because they're the ones that set the policy.
    I appreciate this hearing but I think this is a great idea.
    What is the default rate on guaranteed loans? The default 
rate is 1.4 percent. What was it last year?
    Ms. Cooksie. The default rate is 1.7.
    Senator Talent. Oh. That's the delinquency rate, which is 
comparable to private lenders.
    This is a program that is working. Again, I'm not trying to 
take it out on you. You're the ones that have to be in front of 
us. But this program is working. And if they're going to take 
the safety net away from farmers I don't think there's any way 
they can do it by rule.
    So I've seen this over and over again over the years. We 
ought to get OMB down here and let them explain it. We ought to 
find out if whoever is driving this has ever even been on a 
farm. Sometimes I wonder about that.
    Thank you Mr. Chairman.
    Thank you, guys.
    The Chairman. You make a good point.
    And the issue relative to the size of the loans is another 
policy by OMB. And I think the fact that we've had a lot of 
these numbers in place for a couple of decades is an indication 
we need to review the overall program.
    Senator Talent. I understand where these officials are 
coming from, Mr. Chairman. What I've said reflects my 
frustration that these decisions are being made by people who 
generally don't come before the Committee and can have a 
devastating effect on this program, which is working; which, 
frankly strikes the right balance. So I certainly will work--
and we have a lot of senators who signed the letter that I sent 
the Department to ensure that this doesn't happen without 
Congressional approval.
    If we can't trust the executive branch to follow the law we 
need to put additional safeguards in the law.
    Thank you, Mr. Chairman.
    The Chairman. Those decisions are also being made by folks 
who have no idea whether or not a peanut grows on a tree or 
which end the cash is on.
    Thank you very much for your participation this morning. 
You've been very helpful. We look forward to staying in touch 
as we move forward over the next several months. Thank you.
    Our next panel will come forward.
    Dennis Everson, President, Agribusiness Division of the 
First Dakota National Bank in Yankton, South Dakota; Betsy 
Senter, National Association of Credit Specialists, FSA, and 
National Association of Federal Managers, from Gregory, South 
Dakota; and Ms. Karen Krub of the Farmers' Legal Action Group, 
Incorporated, in St. Paul, Minnesota.
    [Pause.]
    Thanks to each of you for being here this morning. We look 
forward to your testimony and your response to questions.
    Mr. Everson, we'll start with you.

 STATEMENT OF DENNIS EVERSON, PRESIDENT, AGRIBUSINESS DIVISION 
                 OF FIRST DAKOTA NATIONAL BANK

    Mr. Everson. Thank you, Mr. Chairman, members of the 
Committee. I'm pleased to be here representing the American 
Bankers Association. Again I am Dennis Everson, president of 
the Agribusiness Division of the First Dakota National Bank in 
Yankton, South Dakota.
    We're a community bank in Yankton. We have about $623 
million in total assets with about 202,000 operating loans in 
our portfolio. In addition, we service about $333 million of 
loans that we actively participate in the secondary market 
with.
    The FSA guaranteed farm loan program has enabled 46,000 
farmers and ranchers to have 62,500 loans with an outstanding 
principal balance of $8.9 billion at the end of fiscal 1905. 
Every year approximately $2.2 billion of new credit is advanced 
under the FSA guaranteed loan program in the form of 
approximately 10,300 new loans. The average loan size is 
$212,000 in fiscal 1905.
    I am pleased to report to you that banks make more loans 
under the FSA guaranteed loan programs than anyone else. Today 
there are 3,222 participants and lenders that participate in 
the FSA. Of that number 93 percent are banks.
    Considering the fact that FSA guaranteed loans were made to 
those farmers and ranchers having some sort of credit 
deficiency, the losses incurred in the program has been very 
modest. This is a great success story that does not get told 
enough. Loan losses are low because banks make the credit 
decision and banks are responsible for servicing the loan from 
cradle to grave.
    The success of guaranteed loan programs is due to the 
dedication of bankers and FSA personnel who are focused on 
constant program improvement. We are concerned about several 
recent proposals and other developments that we believe will 
negatively impact the future programs used by banks.
    One, ABA opposes increasing the fees on the FSA guaranteed 
loan. We believe that increasing loan fees in the FSA 
guaranteed loan program is inconsistent with the goals of the 
program, which is to help those farmers and ranchers that need 
some additional support for their borrowing. ABA's 
recommendation: We oppose increasing the fees on FSA 
guarantees. Further, we request level funding for the FSA 
guaranteed loan program at a level that would allow annual 
guaranteed loan making in the area of 2.5 to three billion 
range, consistent with the annual demand over the past few 
years.
    In addition, we support legislative language that would 
prohibit USDA from raising fees without Congressional 
authorization.
    The second issue, use of the term 'average agricultural 
loan customer interest rate' should be abandoned. ABA's 
recommendation: This provision should be repealed. Market 
forces should determine the price of credit.
    As the regulations currently stand, any bank that writes a 
guaranteed loan today is exposed to additional lender liability 
because no one can define who is an average agricultural loan 
customer. This provision does not protect borrowers. Instead of 
making more credit available, more lenders will stop using the 
program to avoid lender liability.
    Third issue: Borrower term limits are significant obstacles 
to credit access for farmers and ranchers. In the mid-1990's 
Congress sought to limit the amount of time the borrower would 
be eligible for either direct or guaranteed credit from FSA. 
The 2002 farm bill suspended borrower term limits. The ABA 
supported the suspension.
    When the 2002 legislation expires, term limits take effect 
again and the results would be devastating to those farmers and 
ranchers who still need additional support that an FSA 
guarantee provides them.
    ABA's recommendation: Language imposing borrower term 
limits should be repealed. The last issue: The definition of 
family farm must be revised. FSA has attempted to define a 
family farm many times for purposes of determining loan 
eligibility. All of these attempts have failed. ABA's 
recommendation: FSA should adopt the definition that can be 
objectively measured, not subjectively measured. We recommend 
the definition of a family farm be limited to two criteria: 
One, the majority of the credit needs of the borrower are met 
under the FSA guaranteed loan limits; two, the entity being 
financed files a Federal farm tax return.
    In summary, the FSA guaranteed farm loan program is an 
important tool that banks use to provide credit to the broadest 
array of farmers and ranchers. Without it a significant segment 
of the farm/ranch population will have a difficult time finding 
credit. We have made great strides in making this program work 
more efficiently for everyone, and we hope we can continue to 
make additional improvements.
    Thank you for this opportunity to express the views of the 
American Bankers Association. I will be happy to answer any 
questions.
    [The prepared statement of Mr. Everson can be found on page 
27 in the appendix.]
    The Chairman. Thank you very much.
    Ms. Senter. 

  STATEMENT OF ELISABETH B. SENTER, CONFERENCE CHAIR, FEDERAL 
   MANAGERS ASSOCIATION, USDA NATIONAL ASSOCIATION OF CREDIT 
               SPECIALISTS,--FARM SERVICE AGENCY

    Ms. Senter. Chairman Chambliss, distinguished members of 
the Senate Committee on Agriculture, Nutrition and Forestry, I 
sit before you today as a former president of the National 
Association of Credit Specialists of FSA and the chair of 
Federal Managers of USDA Policies.
    On behalf of the 1700 managers and the larger Federal 
manager community, let me take a moment to present our 
organizations views today. We appreciate your leadership in 
assuring the stability of farm loan programs. I am currently a 
farm loan manager in Winner, South Dakota, where I provide 
making and servicing of a diverse loan portfolio serving 
farmers and ranchers. As loan manager I work daily with a 
variety of customers who do not qualify for direct loans from 
private lenders for legitimate reasons but still have a viable 
operation worthy of Federal support.
    Since the passage of the 2002 farm bill the farm loan 
program continues to meet the needs of rural farming 
communities around the country. Between the authorization of 
bridge loans, changes to the beginning farmer down payment 
program, reduction in bureaucratic tape and the increase of low 
document loans, the agency has done well by the actions of the 
Congress on the 2002 farm bill.
    As the measure is set to expire at the end of the year, 
Congress is in a critical position to address some issues we 
believe would strengthen the program. For starters, term limits 
on direct and guaranteed loans present an unrealistic timetable 
for customers to move away from Federal assistance.
    I work with a family in South Dakota that began farming 6 
years ago and has 1 year of direct operating loan eligibility 
remaining. As of today, it looks like they will not harvest any 
spring grain and will incur a significant financial setback due 
to dry weather in our area. With only 1 year of FSA loan 
eligibility remaining it is not likely they will be able to 
prosper enough between now and then to meet commercial lending 
standards. Eliminating the term limits would give this family 
and similar families around the country more time to get on 
their feet and build an economically sustainable farm or ranch.
    To further assist farmers and family size farmers and 
ranchers, we believe the loan limit of 200,000 is outdated. 
This level for direct operating and farm ownership loans was 
established more than 20 years ago and does not meet the needs 
of modern day operations. By increasing the loan limits to 
$300,000 we will be able to offer more meaningful financing.
    Earlier this year the president proposed an increase in 
guaranteed loan fees in his budget proposal for USDA in fiscal 
year 2007. These fees would be charged to the commercial 
lenders, who would then pass the costs directly on to the 
customer. This seems to contradict the purpose of the program's 
effort to help financially needy farmers to obtain money for 
their operations.
    While these three reforms would help address some of our 
concerns with the technical aspects of the farm loan program, 
there are larger issues threatening the stability of our 
overall operations.
    The impending retirement tsunami within the Federal 
Government threatens to rob the farm loan program of its most 
valuable asset: human capital. According to an FSA study 28 
percent of loan officers will be retirement- eligible as of 
2008, while 50 percent of the supervisory employees will be 
eligible in the same timeframe. What's more, it takes 18 to 24 
months to train a loan officer.
    In Michigan if all the employees who are currently eligible 
to leave retire 11 counties of the 83 counties would have no 
loan officer present. Within 2 years 46 percent of the State of 
Michigan has the potential to have no loan officer coverage for 
FSA.
    Perhaps the most challenging obstacle our agency faces is 
the state of our information technology hardware and software. 
Outdated computers, servers and applications at times force us 
to send customers home without service because our operations 
are down. Every year budgets seem to reduce our funding for 
information technology and adversely impact our ability to work 
well with our customers.
    We believe that the farm loan program portfolio is in good 
financial standing. However we foresee a potentially dangerous 
storm brewing, a combination of questionable economic 
conditions, unknown weather patterns, human capital 
deficiencies, technology failures, and bureaucratic hindrances 
on the horizon, a preventable scenario that could be harmful to 
the rural American agricultural industry.
    We believe elimination of term limits, increase of loan 
limits, keeping the current fee structure for guaranteed loans, 
paying greater attention to growing attrition rates, and 
improved agency resources in IT could head off a potential 
disaster before it reaches critical mass.
    We encourage you in your capacity to address these issues 
and help us provide the best service for farmers and ranchers 
in rural America.
    Thank you again for the opportunity to appear before you. 
I'll be pleased to answer any questions you may have.
    [The prepared statement of Ms. Senter can be found on page 
60 in the appendix.]
    The Chairman. Thank you.
    Ms. Krub. 

 STATEMENT OF KAREN R. KRUB, FARMERS' LEGAL ACTION GROUP, INC.

    Ms. Krub. Thank you, Mr. Chairman and Committee members. I 
appreciate the opportunity to testify here today and to bring 
to the Committee's attention concerns of farm loan program 
borrowers about the program's operation.
    I'm a senior staff attorney with Farmers' Legal Action 
Group in St. Paul, Minnesota. And I'd like to take a minute to 
describe FLAG and explain how we come to know about borrowers' 
experiences in the Farm Loan Program.
    FLAG is a non-profit law center that provides legal 
education, training, and support to family farmers and ranchers 
and their lawyers and advocates across the country. Over the 
past two decades FLAG has worked to improve the accessibility 
of USDA's credit and disaster programs and to help farmers 
understand their rights and obligations in those programs, and 
also the administrative review processes under those programs.
    As part of this work FLAG has monitored and extensively 
commented on changes to the FLP. FLAG has prepared various 
legal education materials about the FLP and has distributed 
them to thousands of farmers and ranchers across the country.
    FLAG attorneys also field hundreds of calls and letters 
from farmers and ranchers every year. Through these 
conversations we have learned much about farmers' actual 
experience with FLP and have identified serious concerns with 
the agency's implementation and administration of the Farm Loan 
Programs. And I will highlight a few of those concerns here.
    The first concern is whether the Farm Loan Programs are 
being implemented in such way to meaningfully increase the 
availability of loans to credit-worthy farmers and ranchers who 
are otherwise unable to obtain financing. One aspect of this is 
the pervasive sense among borrowers that we talk with that 
there is simply no small money to be had, that the larger loans 
are consuming all of the limited program funding.
    There are also concerns that banks are shifting existing 
borrowers to the guaranteed loan program so that the program's 
funding is depleted without actually increasing the number of 
farmers who have access to credit.
    Second, the agency's current proposal to gut the Farm Loan 
Program regulations and rely instead on internal directives to 
administer the program and to return broad discretion to the 
local office personnel is a fundamental step backwards for the 
agency and for borrowers.
    It is essential that clear information about the handling 
of loan applications and servicing requests remain part of the 
rule so that every applicant and borrower is treated 
appropriately.
    Similarly, limited discretion for agency staff under the 
direct loan program has a historical context that must not be 
forgotten. Borrowers are justifiably wary of policy changes 
that would reopen areas of discretion that have been narrowed 
to address prior abuse.
    Third, direct loan borrowers affected by the devastating 
hurricanes in 2005 are very concerned about the double- payment 
that will be coming January 1st.
    The agency's actions in the wake of the hurricanes last 
fall to quickly provide debt relief to borrowers was admirable. 
However, rather than using the model of the successful existing 
program, Disaster Set Aside, through which disaster affected 
farmers can defer the loan payment to the end of the loan term, 
the agency opted to defer the borrowers' loan payments for just 
1 year so that borrowers are looking at a double- payment this 
January 1st.
    Not surprisingly, borrowers who went through the hurricanes 
haven't had sufficient time to recover enough to be able to 
handle a double-payment just 6 months from now.
    There are obstacles faced by applicants and borrowers in 
the programs to exercise and see the benefits of the 
administrative appeal rights that they have. There continue to 
be serious problems with the agency not properly notifying 
applicants and borrowers of their appeal rights and not 
implementing the decisions when borrowers are successful.
    Finally, I'd like to take a moment to address some of the 
comments that Ms. Cooksie made about the 951(s) aspect of loan 
servicing. The 12 and a half days she was talking about for the 
turn-around time is with respect to applications; that was not 
responding to loan servicing requests. She said she was still 
getting those numbers.
    Also the 1951-Sloan restructuring was from the 1987 Ag 
Credit Act, that is when it came into play. It doesn't in fact 
require different types of servicing than a commercial lender 
might do. It's loan consolidation, extending the term of the 
loan, changes in interest rates. These are things a commercial 
lender might do. What the Ag Credit Act does is that it 
requires FSA to consider these things if the borrower asks them 
to before accelerating and foreclosing.
    At a minimum, the Act's requirement says that the right the 
borrower has is that if the government would be no worse off 
restructuring rather than foreclosing then the agency should 
restructure. I wanted to clarify that.
    Thank you.
    [The prepared statement of Ms. Krub can be found on page 50 
in the appendix.]
    The Chairman. Thank each of you for your testimony.
    Mr. Everson, from your perspective as a banker, how is the 
farm sector doing this year? Are there any parts of the country 
that concern ABA and your members at this point?
    Mr. Everson. Very much so, Mr. Chairman. The Midwest, it's 
no secret that the drought is a huge issue for us at this 
point, certainly in the area my bank services loans in.
    A bigger issue is all the input cost increases that we've 
seen this year, including fuel and fertilizer as well as 
escalating land prices. I had a strategic planning session with 
my staff just a week ago, and one of the things that is a major 
objective next year is, let's get geared up on the FSA 
guaranteed portion.
    We know we have a lot of borrowers that are going to need 
us this year unless conditions change, both economically and 
weather-wise.
    The Chairman. In your testimony you urge continued 
suspension of the term limits. Yet farm loan programs exist to 
provide temporary sources of credit.
    Shouldn't we figure out some method by which farmers can 
graduate to private sources? And, of course, that's what we 
intended to do by the term limits. But talk to us a little more 
about that.
    And Ms. Senter, I would ask that you address this, too, 
since you directly responded to that in your testimony.
    Mr. Everson. Certainly.
    First of all, the term limits that are in place, again, as 
I said, need to be suspended. I think it's difficult as it is 
many times to come up with a subjective measuring stick, if you 
could: How long is too long?
    Because I have a lot of young borrowers and sometimes--I 
call the young borrower 45 years old with two sons going into 
the business. Consequently we do graduate a lot of borrowers. 
We have been involved in that in our process in our bank. But 
there are some borrowers with a significant increase in capital 
requirements in the business today that will continue to need 
guaranteed lending specific to their respective cases.
    Again it might be a very young borrower, maybe another 
operator who had several children who are wishing to return to 
the farm. So it's very difficult to become objective in 
determining what that would be.
    The Chairman. Ms. Senter.
    Ms. Senter. I would have to say, Senator, that I think that 
the graduation policy or the graduation regulations that we 
have in place, as Carolyn Cooksie mentioned, is working. We've 
graduated over 3000 borrowers. I think those rules are in 
place.
    I don't think that the term limit should be used as a 
graduation tool because there are customers that maybe have 
some problems or have maybe a risky operation that require 
Federal assistance just a little longer than maybe would be on 
the average. But these customers are worthy customers and they 
need our support.
    Also what we've noticed, too, is the dollars that are 
coming back from farm program payments are going down. Interest 
rates are going up, fuel costs are going up. We've had a lot 
more interest from the banks and from the customers also that 
are interested in our credit because of these risk situations. 
Interest rates going up at the banks makes a big difference.
    The Chairman. What about loan levels, Mr. Everson? Does ABA 
have anything relative to what we should do with regard to loan 
levels?
    Mr. Everson. With respect to the direct program, Mr. 
Chairman
    The Chairman. Yes.
    Mr. Everson. I don't believe that we have a recommendation 
in that area.
    But given what we've heard this morning I agree totally 
that the farming sector has changed dramatically and those 
limits need to be increased. As of this time we have not 
crafted a proposal as to what that may be.
    The Chairman. Ms. Senter, as an FSA credit specialist, you 
do have a unique perspective on farm credit issues. In your 
experience, what would you describe as being a typical farm 
loan customer?
    Ms. Senter. A typical farm loan customer in my area of 
South Dakota might be very different than the east coast or 
west coast. But I think when you're talking about sales of 
$250,000 or less, it might be in that vicinity in my ticular 
area. East coast, west coast, the scenarios might be totally 
different.
    We found, you know, that agriculture is changing. It's 
diversifying into a lot of different crops and different areas 
that we're not familiar with in our area. We are wheat, cattle, 
maybe some corn area. But it's so diverse that it makes it 
difficult to be rock solid in your definition of what that size 
is in our area.
    I talked to a customer recently. I said 'What is the 
typical cattle ranch? How many cows is that?' It might be 300 
cows in a big family size operation. In order to be profitable 
with the cost of family living and fuel and other things it 
takes about that much.
    The Chairman. What's the average cast load per credit 
specialist, and is that too much, too little, or about right?
    Ms. Senter. I think what we've seen is we've seen the case 
load probably 150 to 200 customers maybe. I'd say maybe more 
than 100, 150. This varies across the country.
    What we notice, too, is that employees may be in different 
places, that we have shortages in one area and maybe we're a 
little long in other areas. But agriculture has changed where 
we may be dealing with maybe a little larger operator, maybe 
less operators than we did before.
    But with our credit and the way we are structured we have 
to work very closely with the banks in order to make these 
operations successful.
    The Chairman. In her written testimony Ms. Krub expresses 
concerns about FSA's streamlining initiative because it would 
not provide farmers a reliable method of accessing information 
and it would give more authority to the local office employees.
    Would you care to comment on that?
    Ms. Senter. Like I said, Ms. Cooksie has led us into the 
streamlining project. And I think the intent was to reduce the 
regulation. A lot of our regulation was directly out of the 
Conn Act. It was hard for customers maybe to interpret that.
    The change in regulations might be a little difficult for 
customers. But I do think that that information is probably 
accessible. Maybe it's a little hard to get to on the Internet. 
I haven't personally tried that. But I think that will be 
available to the customers.
    The Chairman. Ms. Krub, some of the concerns you raise, 
such as providing farm loan program advice to borrowers, seem 
to be easily resolvable.
    Is your organization working with the FSA on issues like 
this?
    Ms. Krub. We certainly try to.
    The response that Ms. Cooksie made to Senator Harkin's 
question earlier about the failure of the agency to respond 
within their own timeframes for loan servicing requests, when 
she referred to the anomalies and ``things happen'' those seem 
to be the kind of responses that we get, whisch aren't terribly 
meaningful to the individual farmer who has any experience of 
it.
    We have not had any luck agency-wide with getting the 
national office to address this, which is one reason why I 
wanted to bring them to the attention of this committee.
    The Chairman. Regarding your concern about national appeals 
decisions, why does FSA appear to have trouble implementing 
them?
    Ms. Krub. I don't know why. I just know it's certainly not 
in every situation. I can give you an example.
    There's a farmer in North Carolina who submitted a loan 
servicing request in 2003 who has since been through three 
National Appeals Division hearings and has been successful in 
every hearing. With every determination that came from NAD, the 
agency requested additional financial information. The farmer 
has within the timeframe set provided all the information and 
still does not have a resolution.
    You know, the borrower community interpretation of that is 
if FSA doesn't like the decision they sometimes just won't 
implement it. And when NAD was created, that [NAD] staff is 
very explicit about this when we raised this concern with them, 
they don't have any enforcement authority. The farmer's only 
recourse is to file a Federal complaint. That's beyond the 
capability of almost everybody who is a direct loan borrower.
    The Chairman. Senator Talent.
    Senator Talent. How would you all describe the effect of 
the proposed increases in the guaranteed loan program on the 
program? Would it be marginal, would it be substantial, 
devastating, or somewhere in between those?
    Would you like to describe that? Mr. Everson, maybe you 
could start.
    Mr. Everson. I'd be happy to.
    In the calculations we have done the increase--we have 
talked about a lot of dollars today, but not how it might 
increase--but let's look at it on a percentage basis. We're 
going to increase the cost of that interest cost to that 
customer in a range of somewhere between 100 to 200 percent, 
depending on the type of loan that they're making application 
for in the guaranteed loan program. That's substantial in light 
of already escalating interest rates in the market.
    The other thing that I think is very important to 
understand here is that we talk about these charges relative to 
the claims that are seen today within the system. What happens 
if there are more claims in the future? Those fees could 
increase substantially beyond even what we're looking at today, 
which would take that 1- to 200 percent, perhaps 300 percent, 
which again seems like we've got a really very efficient 
program that doesn't exist.
    Senator Talent. Would you say that the effect would be to 
very substantially reduce the loan portfolios and the number of 
farmers able to take advantage of them?
    Mr. Everson. Yes, I would say it would be substantial.
    Senator Talent. Just to get at the purposes of the 
guaranteed loan program, I was jotting down a few 
considerations. And see if you agree with this:
    It seemed to me that this information was intended by the 
Congress to provide capital for the younger farmers in response 
to the problems with aging among family farmers, given the 
importance of farms to the rural economy, the need to sustain 
the values of the land and the country, and the need which the 
Office of Management and Budget never seems to recognize: to 
sustain the system that has provided the safest and most 
abundant food supply in the history of mankind.
    Congress made a judgment that it was worth a small subsidy 
every year in order to get these benefits. Would you agree that 
those are the benefits of the guaranteed loan?
    Ms. Senter. Yes, I would have to agree with that.
    I think, speaking about the guarantee fees in general, I 
think the whole concept would be devastating because you have 
to understand that the customers that are moving--a lot are 
moving from direct financing from our agency to hopefully be a 
commercial banking customer totally. And you're charging them a 
1-percent fee, which most people can ignore that. When you 
start charging .75 basis points on every year, I did some quick 
calculations--and I think some of our members did--I saw this 
was more than $2000 for the term of the load, more than $6000 
for an average loan. That's a significant increase to customers 
that are struggling and trying to move to commercial credit.
    The other thing is that we found that in areas that are 
affected by disasters, Federal Crop Insurance, the averages are 
working their way down, so there's no safety net there. So then 
you couple that with a bank that's going to charge this 
customer an additional fee, how are you going to pay some of 
these fees and continue to operate? The banker might say we 
can't do it without a guarantee; therefore we're not able to 
help you.
    Senator Talent. The thing that bothers me, the program 
reflects the judgment that there is a layer of prospective 
borrowers out there who really do have performing loans. They 
have loans that are good loans, but for a lot of reasons--a lot 
of them having to do with regulations-- you guys can't make the 
kind of loans based on character, maybe, that 20 years ago you 
could have made. And this guaranteed loan program enables you 
to do it within the limits by which you're regulated by your 
agencies.
    In other words, you couldn't make these loans without 
getting heat from your other regulators. But you can on a 
guaranteed basis. And the very fact that the loss rate is so 
low to me reflects that the program is working and 
accomplishing the objectives.
    I know, Mr. Chairman, you think I am beating a dead horse 
here. But I feel strongly about this. I've seen it in other 
contexts. I'm glad we had the opportunity to raise this issue 
here.
    Thank you, Mr. Chairman.
    The Chairman. You raised that point, and Senator Harkin and 
I were talking off the record here about this. And this is 
something we obviously need to look at as we go through the 
appropriations process. I think the House has already taken 
some action on this issue. And we need to look at whether or 
not we need to do the same.
    Senator Talent. It's not for the Office of Management and 
Budget to overturn--we gave them authority over a piece to make 
sure that the program operated properly, not so they can 
reverse a judgment that Congress made in the last farm bill.
    I really think that's what's going on here.
    The Chairman. Thank you very much for being here this 
morning. Thanks for your valuable testimony. We look forward to 
continuing the dialog with you right through the next farm 
bill.
    With that, this hearing will be adjourned.
    (Whereupon, at 11:15 a.m., the hearing was adjourned.)
      
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                            A P P E N D I X

                             June 13, 2006



      
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