[Senate Hearing 111-74]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 111-74
 
                         HEARING ON FARM CREDIT

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

                     CONGRESSIONAL OVERSIGHT PANEL

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

               HEARING HELD IN GREELEY, CO, JUNE 7, 2009

                               __________

        Printed for the use of the Congressional Oversight Panel


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                     CONGRESSIONAL OVERSIGHT PANEL
                             Panel Members
                        Elizabeth Warren, Chair
                          Senator John Sununu
                     Representative Jeb Hensarling
                           Richard H. Neiman
                             Damon Silvers

                            C O N T E N T S

                              ----------                              
                                                                   Page
Statement of Pamela Shaddock, Regional Representative for Senator 
  Udall..........................................................     1
Opening Statement of Elizabeth Warren, Chair, Congressional 
  Oversight Panel................................................     6
Statement of Damon Silvers, Deputy Chair, Congressional Oversight 
  Panel..........................................................    10
Statement of Richard Neiman, Panel Member, Congressional 
  Oversight Panel................................................    14
Statement of Michael Scuse, Deputy Under Secretary, Farm and 
  Foreign Agricultural Services, United States Department of 
  Agriculture....................................................    18
Statement of Marc Arnusch, Owner, Marc Arnusch Farms.............    26
Statement of Mike Flesher, Executive Vice President, Farm Credit 
  Services of the Mountain Plains................................    31
Statement of Les Hardesty, Owner, Painted Prairie Farm, and 
  Chairman, Dairy Farmers of America Mountain Area Council.......    41
Statement of Lonnie Ochsner, Senior Vice President, New West Bank    47


                         HEARING ON FARM CREDIT

                              ----------                              


                         TUESDAY, JULY 7, 2009

                                     U.S. Congress,
                             Congressional Oversight Panel,
                                                 Greeley, Colorado.
    The Panel met, pursuant to notice, at 10:03 a.m. in the 
County Commissioners Hearing Room, Weld County Centennial 
Center, 915 10th Avenue, Hon. Elizabeth Warren, Chair of the 
panel, presiding.
    Present: Professor Elizabeth Warren, Mr. Damon Silvers, and 
Mr. Richard Neiman.
    Ms. Warren. The hearing of the Congressional Oversight 
Panel is called to order.
    Before we begin, I would like to note we have audio devices 
available in the corner to my left for those who need them.
    Welcome to today's hearing before the Congressional 
Oversight Panel. I would like to thank the Weld County 
Commissioners for the use of their hearing room today. We 
appreciate it.
    Before we begin today, the regional representative from 
Senator Mark Udall's office, Pamela Shaddock, is here and she 
would like to make a few remarks on the Senator's behalf. Ms. 
Shaddock, if you could please.

   STATEMENT OF PAMELA SHADDOCK, REGIONAL REPRESENTATIVE FOR 
                         SENATOR UDALL

    Ms. Shaddock. Thank you, Chairwoman Warren.
    My name is Pamela Shaddock, and I am a regional 
representative for Senator Mark Udall. Senator Udall could not 
be here today. There are a number of important votes going on 
in Washington, D.C., but he did want me to read a statement on 
his behalf.
    Chairwoman Warren, as Colorado's senior Senator, I welcome 
you and the Congressional Oversight Panel to Greeley. I am 
pleased that you will hear today from Colorado's agricultural 
and banking communities regarding farm credit, an issue of 
critical importance in northeastern Colorado.
    I look forward to reviewing the Panel's report that will 
result from this hearing and hope that it can offer 
recommendations that will help make Colorado's agricultural 
industry emerge from our current economic challenges.
    Since being sworn in as a Senator six months ago, I have 
taken many actions to try to help the people of northeastern 
Colorado who have been hit hard by the agricultural and credit 
crisis. These actions are outlined in the written testimony I 
am submitting with the Panel today.
    And Chairwoman Warren, if I may approach, I would hand to 
Mr. Neiman a set of copies of his testimony for your records.

    [The prepared statement of Senator Udall follows:]

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    Ms. Warren. Yes, of course.
    Ms. Shaddock. Thank you.
    Ms. Warren. Thank you, Ms. Shaddock.
    The Panel would also like to thank Senator Udall and 
Senator Bennet and Congresswoman Markey and their staffs for 
their help with the hearing today. I appreciate the work of our 
own Congressional Oversight Panel staff, but without the local 
people to help, this simply would not be possible. So we are 
grateful to them for helping us come here.

  OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL 
                        OVERSIGHT PANEL

    Last fall, Congress established this panel to oversee the 
expenditure of funds from the so-called Troubled Asset Relief 
Program, what we have come to know as TARP. It is our duty to 
issue monthly reports to analyze and evaluate the Treasury 
Department's execution of that program.
    Recently our mission was expanded by Congress. We were 
charged with writing a special report analyzing the state of 
commercial farm credit markets and the use of loan 
restructuring as an alternative to foreclosure by recipients of 
financial assistance under TARP. In considering restructuring 
models, we are to look specifically at the restructuring 
programs of the Farm Service Agency at the U.S. Department of 
Agriculture, the Farm Credit System, and the Treasury's 
residential mortgage foreclosure mitigation program for banks. 
Not coincidentally, FSA, Farm Credit, and banks also make up 
the majority of the farm credit market.
    Right now, agriculture appears to be doing well in many 
areas of the country. The farm credit markets also appear to be 
doing relatively well in many places. Unfortunately, there can 
sometimes be more to learn in the places where things are not 
going so well. As we all know, Greeley and Weld County are 
facing tough times, and that is why we are here today, to gain 
insight from your situation.
    A local farm credit market can be stressed for any number 
of reasons, such as a lender leaving the market, natural 
disaster, or shock to the local economy. While we are not here 
to examine the specific causes that led to the stresses on Weld 
County farm credit markets, we do hope to learn from you about 
their impact.
    Specifically, we hope to learn better how a major shock to 
the farm credit system affects credit availability and loan 
restructuring. When the system experiences significant stress, 
what does that mean for borrowers? What challenges do they face 
in obtaining the credit they need to run their farms? What does 
it mean for farmers who need their loans restructured?
    Market shocks also have significant implications for 
lenders. How much flexibility do they have now to meet 
increased credit needs? How do they deal with increased needs 
for loan restructuring?
    The plain truth is that, like many bad situations, there 
are many victims. Today's witnesses may not have caused the 
problems in Greeley, but they are left to deal with the 
aftermath. Today's discussion of how they manage in a credit 
crisis will provide a case study for our report.
    For this hearing, we have invited key farm lenders, as well 
as borrowers, to testify about farm credit availability and 
farm loan restructuring. We invited these witnesses to get 
their perspectives on what is happening nationally, but 
especially what is happening in a locality that is facing 
pressure on both farm credit availability and farm loan 
restructuring. Their take on the local situation will help 
inform us about the national situation.
    Our witnesses today include Michael Scuse, who is the Under 
Secretary for Farm and Foreign Agricultural Services, U.S. 
Department of Agriculture; Marc Arnusch, who is the owner of 
Marc Arnusch Farms; Mike Flesher, Executive Vice President of 
Farm Credit Services of the Mountain Plains; Les Hardesty, 
owner of Painted Prairie Farm and Chairman of the Dairy Farmers 
of America Mountain Area Council; and Lonnie Ochsner, Senior 
Vice President of New West Bank. I want to thank each one of 
you for being here.
    I know that tensions are running high in the area, and we 
all sincerely value your willingness to step forward and to 
offer your perspective. I wish you were not facing these 
problems, but we appreciate your willingness to allow us to 
learn from you.
    I understand that some of you may want to speak when this 
is finished. As has been the practice of the Congressional 
Oversight Panel in each of its field hearings, we will make 
time available after we have concluded our examination of the 
witnesses. So there will be a chance for people to make their 
own personal statements at the end of this proceeding. So we 
will make sure that there is at least some time for that. The 
statements will have to be brief, but we do want to hear from 
local citizens.
    I will now yield my time to Damon Silvers who is the Deputy 
Chair of the Panel and the Associate General Counsel of the 
AFL-CIO. Mr. Silvers.
    [The prepared statement of Ms. Warren follows:]
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    STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, CONGRESSIONAL 
                        OVERSIGHT PANEL

    Mr. Silvers. Thank you, Chairwoman Warren. Good morning.
    I am grateful, like my fellow panel members, for the help 
of Weld County and their hospitality and the help of our staff 
and the Colorado congressional delegation in making this 
hearing possible.
    I am also grateful--and I think we need to acknowledge the 
leadership of Senator Russell Feingold of Wisconsin who 
sponsored the farm provisions of the Helping Families Save 
Their Home Act of 2009, which directed our panel to examine the 
impact of the financial crisis on America's farm families.
    We are here today to take testimony on the impact on farm 
families of the financial crisis and the programs under the 
somewhat long name of the Emergency Economic Stabilization Act 
of 2008, which most of us know by the term ``financial 
bailout.'' We are going to do so today by learning about the 
experiences of farmers and farm credit providers here in Weld 
County where the failure of a major farm lender, the New 
Frontier Bank, has made the issues of farm credit particularly 
urgent.
    Now, in particular, Congress has asked us to make 
recommendations to Congress, as our chair indicated, on how 
best to encourage the restructuring of troubled farm loans made 
by banks for the purpose of saving family farms.
    These issues, the issues of whether banks treat farmers 
fairly, are some of the most enduring issues in the history of 
our country. From the time of George Washington to the panics 
of the 1890s to the Great Depression and the farm crises of the 
1980s, the leaders of our Nation have understood that one of 
the ways in which their leadership will be judged is by whether 
our financial system helps farmers grow the food that feeds the 
world or whether the financial system, in the words of one of 
our witnesses today, ``lends farmers into foreclosure.''
    Today, I hope we are able to address four questions in 
particular.
    The first, what are the features of the Farm Credit System, 
in general--not so much here in Weld County, but in general--
that insulated that system from so many of the destructive 
practices prevalent elsewhere in our credit system in the run-
up to the crash? In particular, I am interested in the low 
levels of securitization in farm credit and the prevalence of 
lending based on income rather than assets.
    Secondly, how do the policies of the Farm Service Agency 
and the Farm Credit System address restructuring loans for farm 
families in trouble, and are there lessons to be learned from 
those agencies and structures both for addressing troubled farm 
loans in commercial bank portfolios and for the broader home 
mortgage crisis which is plaguing our country today?
    Third, what has the effect been on farm credit of the 
Federal Government's aid to the banks? And in particular, what 
has been the effect on farm credit of the way that small banks 
have been treated differently from big banks?
    Finally, have we seen here in Weld County the large banks, 
the ``too-big-to-fail'' banks, step in and lend in the wake of 
the failure of a major lender, New Frontier, that was clearly 
not major enough to be rescued?
    We have heard a great deal about stress tests and bank 
recoveries. I read that the bonuses are flowing again on Wall 
Street. My belief, though, is that the real stress test is not 
the one conducted by the Treasury Department and the Federal 
Reserve but the one that is happening all over this country in 
communities like this one as business people, including 
farmers, seek credit. If credit is not available to small 
business people and to large business people, to builders and 
to farmers, then we have not fixed our financial system, and 
the resulting downward pressure on our economy will inevitably 
breed more banking crises and block economic recovery.
    So in a very real sense, the Panel is here today not simply 
to learn about the state of the farm economy and the family 
farmer, but to learn about whether the TARP, the bailout, the 
program Congress asked us to oversee, is actually working for 
all Americans.
    It is a particular pleasure and honor to see all of you 
here, to see this room full. It reminds us, I think, of this 
panel's solemn obligation to oversee the financial bailout in 
the interests of the American people.
    I look forward to the testimony and I am grateful for the 
people of Greeley and Weld County for welcoming the Panel here 
today.
    [The prepared statement of Mr. Silvers follows:]
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    Ms. Warren. Thank you, Mr. Silvers.
    The chair now recognizes panelist Richard Neiman. Mr. 
Neiman is the Superintendent of State Banks for the State of 
New York and has deep experience in the State bank lending 
area. And I now recognize Superintendent Neiman.

 STATEMENT OF RICHARD NEIMAN, MEMBER, CONGRESSIONAL OVERSIGHT 
                             PANEL

    Mr. Neiman. Thank you, Chair Warren.
    Good morning and thank you all for appearing before us in 
this hearing, an important hearing, particularly for those many 
residents who are also here in attendance.
    You know, we often speak of the financial crisis as if it 
were one event when, in fact, it is a cascade of multiple 
market dislocations that impact every corner of the American 
economy. The current meltdown did not originate in the 
agricultural sector, but as the recession continues, its reach 
is being felt in the farming community.
    I am particularly concerned about deteriorating trends in 
the dairy industry. This is one of the farming activities 
hardest hit by current market conditions. That is critically 
important to you here in Greeley, an area with a proud 
tradition of family farming, but it is also vital to me as a 
member of Governor David Patterson's cabinet in New York. New 
York is actually the third largest dairy-producing State in the 
Nation. So what is happening here in Greeley is happening back 
home as well. And your testimony can provide the insights 
needed to stabilize the industry and agriculture nationwide.
    As part of our mandate, the Panel has been asked to 
consider whether a loan restructuring program for farm credit 
should be developed in the context of the TARP program. This 
panel and Congress are looking for your hands-on experience of 
trends in agricultural lending which makes all the difference 
in designing effective policy decisions.
    Learning to prepare for and adapt to economic volatility is 
nothing new to you in the agricultural sector. Farming is 
highly cyclical by nature, and there are existing programs 
through the Farm Service Agency and the Farm Credit System that 
offer examples of what stabilization initiatives can work and 
why.
    There are three main areas that I would like to look 
forward to exploring today during our dialogue.
    One, the effectiveness of the current foreclosure programs 
through the FSA and FCS, in particular, the success of features 
such as principal write-downs with shared appreciation, pre-
foreclosure notices, and the use of credit review committees.
    Two, the extent to which there is or is not a gap in the 
Federal response structure to farm credit defaults, whether 
there is a need for additional Federal support to complement 
existing foreclosure prevention programs and the forms such 
support should take.
    And three, the overlap between residential and agricultural 
real estate issues especially for the many farms in which the 
family home is also pledged as collateral.
    In designing an effective foreclosure prevention program, 
there is a tension between the need for a streamlined approach 
that can be implemented quickly on a large scale and the more 
time-consuming but personalized approach that may have greater 
long-term success in avoiding default. I have experienced this 
dilemma in leading New York's residential mortgage prevention 
task force.
    And I look forward to hearing your testimony and the 
dialogue today. Thank you very much.
    [The prepared statement of Mr. Neiman follows:]
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    Ms. Warren. Thank you, Superintendent Neiman.
    Now, we will start with our witnesses. I am going to ask 
you, if you will, to keep your oral remarks to five minutes. 
Your statements will become part of the record, so we will have 
the whole thing even if it is longer than five minutes. And 
just to help us stay on time so that we have plenty of time for 
questions and then for comments afterwards, Mr. McGreevy down 
at the far end has got time cards.
    Ms. Warren. Well, we have got to run a tight ship here. We 
want to be sure that we can hear from everyone.
    Thank you very much for joining us. Mr. Scuse, could I ask 
you to start?

 STATEMENT OF MICHAEL SCUSE, DEPUTY UNDER SECRETARY, FARM AND 
  FOREIGN AGRICULTURAL SERVICES, UNITED STATES DEPARTMENT OF 
                          AGRICULTURE

    Mr. Scuse. Thank you, Madam Chair. Madam Chairperson and 
members of the panel, thank you for the opportunity to appear 
before you today to discuss credit conditions in America, 
focusing on the current status and operations of the farm loan 
programs at the Farm Service Agency.
    Reports from the Federal Reserve and other sources indicate 
that there is a tightening of credit for farmers and ranchers 
around this country. A combination of limited or negative 
returns in much of the livestock industry, reduced profit 
margins in crop production, and increased sensitivity to credit 
risk has caused many farm lenders to raise the credit 
standards, reduce the amount they are willing to lend in 
agriculture, or both. Many lenders report that increased 
scrutiny from regulators has caused them to raise credit 
standards significantly.
    Activity in FSA's farm loan programs certainly indicates 
that less commercial credit is available to farmers at the 
present time. Farm loan programs demand is usually counter-
cyclical to the general farm economy. When the farm economy is 
strong, farm loan activity is flat. During times of financial 
stress in the farm economy, the demand for farm program loans 
greatly increases. This makes sense since a basic requirement 
to qualify for the program is to be unable to meet the criteria 
for commercial credit.
    This year, the loan programs in Colorado and across the 
Nation are experiencing demand at substantially higher levels 
than in FY '08. FSA has two basic loan programs: direct loans 
funded directly from the United States Department of 
Agriculture and guaranteed loans funded by local lenders with 
USDA acting as a guarantor. Guaranteed loans are used for 
financing of annual crop inputs, to refinance debt, or to 
purchase capital items like machinery. Farm ownership loans are 
used to purchase real estate and/or improvements to real 
estate.
    In Colorado as of May 30th, 2009, demand for direct 
operating loans was up 27 percent, and demand for guaranteed 
operating loans was increased by 47 percent. An usually high 
number of direct operating loan applications nationally are 
from new customers this year. As of May 26th, 45 percent--45 
percent--of the direct operating loans approved in FY '09 were 
for customers who did not have existing FSA operating loans. 
They are new, 45 percent. Normally, the number is only about 20 
percent.
    The quality of our portfolio has continued to improve due, 
in large part, to our modernization efforts, better customer 
service, and dedication of FSA employees. At the same time, we 
realize that given the increased financial stress in the 
agricultural economy and the increased workload resulting from 
a larger caseload, portfolio performance is likely to somewhat 
deteriorate in the future. We are committed to using all the 
authorities available to assist borrowers and will strive to 
minimize any deterioration in the performance portfolio.
    In FY '08, losses in the direct loan program fell to their 
lowest level since 1986, just 1.7 percent. FY '08 data is 
reflective of the last completed fiscal year as current rates 
are not available.
    Losses in FY '08 in the guaranteed loan program were .3 
percent, the lowest rate since we began monitoring the trend in 
1985. Again, FY '08 data is reflective of the last completed 
fiscal year.
    As with losses, the direct loan delinquency rates were at 
historic lows at 6.5 percent for FY '08. FY '08 data is 
reflective, again, of the last completed fiscal year.
    This is the result of steady and dramatic decreases from a 
23.8 percent delinquency rate in FY 1995. The decrease was 
facilitated by expanded authority since 1996 to offset Federal 
payments, salaries, and income tax refunds to delinquent 
borrowers, in addition to our statutory and programmatic 
changes which have enhanced collection efforts.
    In the guaranteed program, the '08 delinquency rate was 
1.18 percent, again, the lowest since 1995.
    In conclusion, our farm program performance over the last 
few years has been outstanding with delinquencies and losses at 
all-time lows. However, under the challenging economic and 
financial environments agriculture faces today, it is almost 
inevitable that program delinquencies and losses will increase. 
Certainly there is the increased stress in the dairy, poultry, 
and hog industries. However, we are committed to use all 
available options to minimize any increases in program 
delinquencies and losses.
    We are fortunate to have many tools at hand to service our 
accounts and assist borrowers through difficult times. We have 
a wide array of loan servicing options available to assist 
borrowers in restructuring their financial situations when they 
are unable to make payments as scheduled. An orderly method of 
debt restructuring is a critical part of a lender's ability to 
deal with adversity in their portfolio, and FSA can offer 
borrowers the following specific options.
    Primary loan servicing. Any FSA borrower in financial 
distress may apply for loan servicing and borrowers who become 
90 days past due will be notified and reminded of all servicing 
options.
    Subordination. FSA is often able to subordinate its lien to 
a commercial lender to facilitate a borrower's access to 
operating credit from other sources.
    Conservation contract. FSA borrowers with environmentally 
sensitive property may also apply to reduce their FSA debt 
through the conservation contract program by placing qualifying 
land under a conservation contract.
    Disaster set-aside program. Under DSA, eligible borrowers 
can skip one annual payment and move that payment to the back.
    FSA's loan portfolio has shown tremendous improvement over 
the last 20 years and loan failures and losses have declined.
    However, more challenges lie ahead. Government resources 
are increasingly limited and the agricultural production 
landscape is definitely changing. We are experiencing unique 
conditions in the credit and banking sectors and, to a large 
extent, agriculture in general. These changes pose significant 
barriers and challenges to the groups that FSA farm loan 
programs are intended to assist. These issues create major 
challenges for the agency as well since the success of the 
program depends on those whom the programs are intended to 
serve. Because of our rural delivery system and experienced 
loan officers, the FSA farm loan programs staff is well 
positioned to continue the high quality delivery of existing 
programs and new initiatives to assist small, beginning, and 
minority and family farms.
    Thank you for allowing me the time to share the Department 
of Agriculture perspective as you address this extremely 
important issue that affects all of us in agriculture. Thank 
you.
    [The prepared statement of Mr. Scuse follows:]
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    Ms. Warren. Thank you, Mr. Scuse.
    Mr. Arnusch, owner of Marc Arnusch Farms.

      STATEMENT OF MARC ARNUSCH, OWNER, MARC ARNUSCH FARMS

    Mr. Arnusch. Thank you. Good morning.
    My name is Marc Arnusch, and I am a third-generation farmer 
and agribusinessman located in the small town of Prospect 
Valley. I own and operate a large diversified operation 
consisting of approximately 1,400 acres of irrigated farmland. 
Primary crops include sugar beets, grain corn, wheat, 
sunflowers, alfalfa, and onions. In addition to these crops, I 
operate four other ag-related businesses in my community. Our 
operation is large, complex, and very familiar with our banker 
and his ability to service our lines of credit.
    The evolution of my farming operation has not come without 
adversity. Early on in the beginning of my farming career, an 
act of mother nature began to shape the way I operate as a 
businessman. The date was July 13th, 1996 and Prospect Valley 
experienced the worst hailstorm I had ever seen. The storm 
destroyed nearly every field in Prospect Valley, but what it 
really exposed was the inability of producers in my community 
to withstand risk and it put to the test our ability to access 
credit needed to maintain our operations.
    It was apparent our small town bank would not be able to 
withstand the losses most growers were going to face, which 
prompted officials to seek out the assistance of the FSA Office 
and the guaranteed loan program.
    I too began the process of applying for the guaranteed loan 
program only to stop midway through it. It occurred to me that 
I could do all that was required, only to suffer a similar fate 
again. Nothing had changed. It was business as usual, but this 
time it came with a higher debt level.
    How did cheaper interest and high debt provide me an 
opportunity to sustain my production future? I chose a 
different path, one that limited risk, diversified my 
operation, and focused my efforts on marketing and cost 
management.
    I was asked in today's oversight panel to talk about 
business plans and mine consists of five major objectives. Know 
the cost of production. Identify areas of risk and work to 
limit them. Take advantage of market opportunities. Diversify. 
But the most important was being realistic with financials.
    After identifying true costs of production and necessary 
credit needs, I examined what crops were working and which were 
not. Next, all crops were insured against loss of yield. This 
also enabled my operation to take a more aggressive market 
approach via cash forward sales and lessened the effect of 
losses through partial cost recovery.
    My operation began to diversify in order to withstand 
market turmoil and reduce the dependency on just row crop 
production. However, the most significant move was keeping 
realistic financials, ones predicated on being conservative, 
able to withstand the tests such as loss of crop revenue, 
devaluation of land, machinery, and other assets, or economic 
failure.
    Fortunately, my story has a good beginning. However, my 
community has not fared as well. Since the time of that 
hailstorm, 21 growers from Prospect Valley have either been 
forced from production agriculture, retired, or have outright 
quit. This also includes my father. In most cases, the loan-to-
value ratio was too large to overcome which ultimately forced 
the liquidation of some very fine producers.
    Looking forward, the biggest challenge I face as an 
operator is having access to reliable credit at the size 
necessary to run the complexity of my operation. Operations are 
growing and with it are their lines of credit. Many operations 
in Weld County require operating loans in the millions, and 
this number is only going to increase.
    In order to meet this challenge, commercial banks need to 
have a level playing field when it comes to lending. Too often 
a community bank may be scrutinized or limited on a particular 
lending practice by bank regulators when a similar form is 
available through the Farm Credit System. The Farm Credit 
System is a valuable tool to borrowers and is important to the 
future of agriculture in the United States and certainly here 
in Colorado. However, community banks still play a significant 
role in this arena.
    In closing, there are a series of thoughts I would like to 
leave with you. Successful producers of tomorrow will be the 
ones who conserve, resist spending, and can control costs 
almost on demand. They will know their cost of production and 
understand their financial debt structure and will be 
intelligent when restructuring. Farms require financial 
management just like other business sectors of our economy, and 
when difficult market circumstances arise, those who have their 
house in order will most likely be the ones to succeed.
    Any loan program offered via the Government or commercial 
lending needs to emphasize the importance of business 
management. Without this vital component, the availability of 
credit may not make a difference. In fact, it may become the 
weight that sinks middle American agriculture just as it did in 
my hometown.
    Thank you for the opportunity to address the Panel with my 
thoughts and ideas, and I look forward to your questions.
    [The prepared statement of Mr. Arnusch follows:]
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    Ms. Warren. Thank you, Mr. Arnusch.
    Mr. Flesher, Executive Vice President of Farm Credit 
Services of the Mountain Plains.

   STATEMENT OF MIKE FLESHER, EXECUTIVE VICE PRESIDENT, FARM 
             CREDIT SERVICES OF THE MOUNTAIN PLAINS

    Mr. Flesher. Madam Chairman, Mr. Neiman, Mr. Silvers, 
welcome to our community and let me just personally say thank 
you for your service to our country during a very unprecedented 
time of our history.
    My name is Mike Flesher. I'm Senior Vice President of 
Mountain Plains Farm Credit Services. We are a part of the 
nationwide Farm Credit System, which is a unique set of 95 
cooperatives chartered by the Federal Government to provide 
credit and other related financial services to owners and to 
others consistent with the eligibility set out in the Farm 
Credit Act.
    Mountain Plains is owned by more than 1,300 farmers and 
ranchers here in Colorado. We have about $1.2 billion in total 
loans outstanding. Our cooperative structure keeps us focused 
on serving our farmer members while permitting us to share our 
profits with them. Over the past 5 years, we have returned over 
$42 million to our farmer borrowers in this area and the entire 
Farm Credit System has returned some $2.6 billion during that 
time. That money stays in agriculture and it contributes to the 
success of our members.
    The Farm Credit System continues to use its access to the 
national money markets to make credit available to agriculture 
in rural areas. The system provided almost $1 billion of new 
credit to agriculture in the first quarter of this year. 
Mountain Plains--we account for about $30 million of that 
amount during the first quarter.
    The following is what we are seeing regarding the local 
farm economy in our Mountain Plains territory.
    Cow/calf operations make up the largest segment of our 
portfolio, 23 percent. We anticipate these operators will 
experience average to slightly below average profitability this 
year.
    Hay crops, the second largest part of our portfolio, at 14 
percent. The demand is strong. The price is good. The supply of 
dairy quality hay, though, is down due to some unusual rains 
that we have had in our area this year.
    Third in size of the portfolio segment is the dairy 
industry. This industry is experiencing historic losses due to 
low milk prices and high input costs. And we have contacted all 
of our dairy borrowers individually to discuss options for 
sustaining their business. We believe that communication is key 
to working with our customers.
    We also serve borrowers that produce stocker and feedlot 
cattle, corn, wheat, fruit and vegetables, as well as those 
involved in nursery and greenhouse operations, and all of those 
segments of the industry make up the remainder of our 
portfolio.
    We make use of the USDA's Farm Service Agency loan 
guarantees to support our lending. These guarantees are an 
important tool that allow us to serve higher risk credits that 
might not otherwise meet our underwriting standards. This 
program is very important in helping us stay with borrowers in 
stressful times.
    As economic stress increases in agriculture--and as you 
have heard here today it is increasing in agriculture, 
especially in certain segments--we stand ready to work with our 
customers as they deal with their individual challenges. For 
the past 20 years, since the mid-1980s, the Farm Credit System 
has operated with statutory borrower rights requirements. 
Troubled borrowers get notification on their standing and what 
they can they do to avoid foreclosure.
    For example, a borrower that is current on loan payments is 
protected against foreclosure. The lender cannot impose 
previously unscheduled principal reductions.
    If a borrower is demonstrating adverse financial and 
repayment trends, we notify the borrower of the right to apply 
for restructuring, and we provide them with the necessary 
materials to make that application.
    The borrower is provided an opportunity to fully review the 
status of their loan, to develop a plan and seek loan 
restructuring. This may include a combination of debt 
forgiveness, release of collateral, reamortization, 
refinancing, and/or deferral of payments. In the restructuring 
of a distressed loan, the least-cost analysis of restructuring 
versus liquidation must be implemented.
    If restructuring is denied, we must provide the customer 
with the rationale in writing and let them know that they can 
request a review of the decision by a credit review committee. 
Now, that committee must include at least one former board 
member and it may not include the loan officer that is involved 
in making the initial decision.
    And finally, should there be a foreclosure sale, the 
customer retains the right of first refusal to purchase or to 
lease their property.
    Now, our experience of more than 20 years of operating this 
type of very specific loan restructuring requirements has 
taught us a few things. First, it is very important that the 
basics of loan making be followed. Second, communication is 
critical. The better you know a customer and their farming 
operation, the better position you are as a lender to 
anticipate a problem. And finally, working with customers 
rather than being in conflict with customers makes for better 
business.
    Farm Credit serves agriculture in good times and in bad. 
The borrower rights have helped us keep focused on serving our 
marketplace when the environment is more bad than it is good.
    I will give you a recent of this. We had a long-term 
relationship with a three-generation farm family that has been 
successfully involved in raising row crops and feeding cattle. 
To diversify their operation, the family started a dairy heifer 
replacement program which was profitable for several years. And 
although this business was well managed, escalating input costs 
and the downturn of the dairy industry brought them financial 
stress, and those stresses have continued and grown.
    Instead of giving up on them, we reworked the credit. We 
advanced them new money to meet their operational needs to 
raise livestock and crops. Our goal is to help them return to 
profitability.
    What we have done for the borrower and what the borrower 
has done for themselves has given them an opportunity to stay 
in business during that extremely challenging down cycle. This 
farm family has a strong management team. They have implemented 
efficiencies that are serving them well now and will serve them 
even better when things do improve. It is only when our 
customer-owners thrive that we can be successful.
    At Farm Credit, we know that the economy, the markets, and 
the commodity prices are cyclical. This comes with 93 years of 
experience.
    Thank you for the opportunity to testify. I would be 
pleased to answer your questions.
    [The prepared statement of Mr. Flesher follows:]
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    Ms. Warren. Thank you very much, Mr. Flesher.
    Mr. Hardesty, the owner of Painted Prairie Farm.

  STATEMENT OF LES HARDESTY, OWNER, PAINTED PRAIRIE FARM, AND 
    CHAIRMAN, DAIRY FARMERS OF AMERICA MOUNTAIN AREA COUNCIL

    Mr. Hardesty. Well, good morning and thank you. My wife 
Sherrill and I farm just north of town here, just outside of 
town. We farm about 300 acres of forage crops, and we milk 
about 650 cows.
    I think an overview of the dairy situation, the situation 
we find ourselves in today, really would start with the 
decreased worldwide demand, credit issues--that is what we are 
here about today--and high input costs. All of this is detailed 
in my report. I will not go into a lot of detail here.
    This has put our dairy farm families in a dire situation. 
The complicating factor has been the strong demand for U.S. 
dairy worldwide in the recent past, and consequently strong 
prices due to that demand. This has sent a false sense of 
security and increased debt levels into our industry.
    I would like to provide you with just a brief overview of 
the dairy industry to help put in perspective the magnitude of 
this situation. In 2008, 57,127 commercially licensed dairy 
farms produced about 190 billion pounds of milk from 9.33 
million cows, generated a revenue of about $38 billion from 
milk. In addition, our farm families have another $110 billion 
invested in their facilities, their operations, their cattle, 
and their equipment.
    Wholesale dairy product prices are down by more than 40 
percent, now under the cost of production for most, if not all, 
of our U.S. dairy farmers. Input costs are up, especially feed, 
as they are influenced by corn costs. The cost-price squeeze is 
like none that has ever been experienced for over a generation. 
Demand must come back soon for many of our dairy farmers to be 
able to have a chance at recovery.
    The credit crisis is serious as banks and lending 
institutions tighten the requirements and start to lose the 
willingness to participate in agricultural lending. The 
volatility of ag prices and profits is becoming more than most 
lenders care to bear.
    Reliable sources of ag credit are drying up. Ag loans have 
historically been asset-based with careful consideration given 
to positive and continued cash flow. Most dairies structure 
their loan portfolio into three types: longer-term money used 
typically for real estate; midterm used for facilities, cows, 
and equipment; and short-term or operating funds renewed 
annually and used to purchase feed. Currently all of our own 
personal notes are with a local bank.
    The planning process and consequent business plans of dairy 
operations really vary according to the stage of the business. 
You might have a growth-oriented business. You might have a 
stable business that is content with status quo, or you might 
have a business that is beginning to or preparing to exit. All 
three will formulate a different business plan, but in 2009, 
even the best laid business plan did not predict the severe 
downturn and length of pain that our farmers are experiencing.
    In the future, risk management tactics and forward pricing 
contracting will be required by lenders. This may add even more 
stress as dairies will now have to include margin call accounts 
to their loan portfolio.
    What can TARP do for dairy farmers? Require that 
institutions that have received funds to develop programs and 
commit resources to farm loans. We should develop new products 
specifically for rural America and assist rural lenders so that 
they can continue to lend.
    Secondly, dairy farmers are all about helping others. With 
so many people searching for new jobs today, food aid 
assistance programs are being utilized at alarming rates. If 
TARP funding was used temporarily to increase the CCC purchase 
price for cheese and nonfat dry milk, all of those products 
could go back immediately into food assistance programs.
    In conclusion, I do realize the daunting task that is at 
hand for this committee. I would ask that you keep the 
following statement in mind as you prepare your report. 
Agriculture is the backbone of America. It has helped us stand 
tall over the years. Without a vibrant rural economy, main 
streets across America will close indefinitely. Our country was 
built on agriculture. Farmers are the original recyclers and 
stewards of the land. We provide open spaces for our city 
cousins and safe, wholesome dairy products for our consumers. 
Without a strong U.S. dairy industry, our food needs will have 
to be more reliant on imports from countries that have food 
safety regulations that pale in comparison to ours. This 
committee needs to do all it can to keep America's food 
producers viable during this cycle.
    Most importantly, thank you for listening and I look 
forward to your questions.
    [The prepared statement of Mr. Hardesty follows:]
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    Ms. Warren. Thank you very much, Mr. Hardesty.
    Mr. Ochsner from New West Bank.

 STATEMENT OF LONNIE OCHSNER, SENIOR VICE PRESIDENT, NEW WEST 
                              BANK

    Mr. Ochsner. I would like to thank the Panel for allowing 
me to share my thoughts as a locally owned and independent 
bank.
    The management team at New West Bank has a long history of 
agriculture lending experience. I was born and raised in this 
Weld County area on a farm, and I personally have 26 years of 
ag lending experience. Our CEO and bank President have 36 and 
30 years, respectively. We all started our careers as ag 
lenders, and we have a total of six ag lenders in our 
operations.
    New West Bank currently has approximately 20 percent of our 
loan portfolio in ag loans, and we are actively seeking 
qualified agriculture borrowers that meet the industry lending 
standards.
    The bank has a diverse mixture of ag loans which includes 
operating lines of credit, intermediate-term financing for 
equipment, and ag real estate loans.
    To make a general statement about the state of the ag 
economy is a bit difficult since within the ag economy there 
are opposing economies at work. This has been true throughout 
history and will continue to be a dilemma that agriculture 
faces. As an example, when grain prices are high, the grain 
farmer benefits while the livestock producer is strapped with 
higher feed costs. When grain prices are low, the opposite 
impact occurs. Unfortunately, supply and demand, exports, and 
the weather, to name a few, are factors that play a big role in 
the volatility of these market swings.
    However, one of the most important factors of success is 
the economics of each individual ag operation, which are 
directly impacted by the debt level of that operation. Those 
operations with acceptable levels of debt and proper structure 
are much more capable of weathering these economic cycles.
    In general, crop products have been very profitable over 
the past several years. With good prices and good weather, 
these producers have experienced record earnings and 
profitability.
    The dairy industry has suffered a decline in milk prices 
over the past 12 months but saw record high prices for two 
years prior to that decline. This industry is able to expand 
more rapidly than many other ag sectors. Record high prices 
prompted rapid expansion, and consequently, milk production 
levels increased rapidly. Again, this is nothing new, and those 
operations with prudent debt levels are able to survive the 
lows and flourish during the highs.
    There have been dairy buy-out programs in the past that 
have taken excess cows out of production, and once again, there 
are too many cows in production at present. Cows that are 
coming out of production early will ultimately correct the 
problem, but this creates another opposing economic dilemma. 
More dairy cows going to slaughter have a negative impact on 
the beef cattle market.
    New West Bank's dairy operations are definitely feeling the 
impact of low prices at present, but have been cautious with 
their debt levels and have expanded slowly and carefully, which 
has allowed them to survive this down cycle.
    Current cattle prices are weakening, a result of the dairy 
cattle over-supply and liquidation. But in general, the rancher 
has been profitable over the past years.
    Today, the risk and volatility of the markets have 
unfortunately made cattle feeding a very volatile industry, and 
the family farmer is involved on a rather limited basis. 
Commercial feedlots and investor feeders are more the norm than 
are family-owned feedlots. New West Bank has only three 
remaining farmer feeders. These operators have been very 
cautious over the past few years by using price protection 
methods and sitting out of the market when the economics were 
not suitable.
    In summary, the ag operators in the northern front range 
and eastern plains of Colorado have experienced good 
profitability over the past 5 years. This is evidenced by very 
few liquidation sales and the high quality of agriculture loan 
portfolios of most of the ag banks in northern Colorado.
    At the present time, New West Bank does not have a crop 
farmer or dairy farmer or cattle producer whose loans are 
adversely classified under the FDIC's risk classification. 
Based on this, our ag portfolio is as strong as it has been in 
years.
    As discussed, agriculture can be cyclical in nature, and as 
always, things can change rapidly. At present, New West Bank 
has not experienced a decline in credit quality or increased 
delinquencies in its ag loan portfolio.
    Annually each year, we discuss with our ag borrowers their 
financial progress, their overall risk in relation to the 
industry averages, and their ability to withstand potential 
adversity. It is not the bank's practice to lend people into 
insolvency or bankruptcy. Unfortunately, the bank must say no 
on occasion, and not all operations remain viable for whatever 
reason, be it bad weather, low prices, low yields, or poor 
management.
    Clearly, the bank's success is directly related to our 
borrowers' success, so it is important for us to give good, 
solid counsel to our borrowers and for us to keep them in 
business as our customers. This, on occasion, requires the 
restructure of debt and possible assistance from the Farm 
Service Agency.
    However, the free market system must be allowed to work 
whether it is in the ag sector or any other sector of the 
economy. Strong operations survive and unfortunately some weak 
operations fail. Sometimes very honest, hard-working people 
fail, which is very disheartening. The biggest injustice is for 
a bank to lend people into insolvency when good counsel may 
have helped them exit while they still had equity they could 
have salvaged. When these producers with weak financial 
positions cannot demonstrate the ability to survive and are 
falsely kept in business by either aggressive lending standards 
or tax dollars, it creates a false economy within the entire 
industry. Weak and highly leveraged operations simply cannot 
borrow their way out of a problem.
    It has been recently suggested that one or two local banks 
would be able to better assist the distressed farm operators 
previously banking at New Frontier Bank if they were awarded 
TARP money. In my opinion, additional TARP money would have 
little or no impact in helping those distressed ag borrowers 
for the following reasons.
    It is a consensus among the banking community that after 
several months of attempting to assist New Frontier borrowers, 
that 90 percent of the ag borrowers from New Frontier Bank do 
not meet normal and prudent lending standards. Only 10 percent 
are considered bankable and many are insolvent. Many of these 
borrowers are good, honest, hard-working people who have been 
loaned into positions they now cannot get out of. Specifically, 
they have more debt than they can repay and their debt far 
exceeds the value of their assets. All the TARP money in the 
world will not change the credit quality of these loans and the 
worst sin of all would be to give TARP money to a bank that is 
already short of capital and ask them to lend to these very 
high risk borrowers.
    Secondly, the performance of the ag industry in general has 
been strong. I submit that most true agriculture banks are not 
in need of additional capital. The majority of these ag 
operations have been profitable, and those banks needing 
capital most likely were heavily involved in commercial real 
estate, spec construction, and land development.
    Thirdly, there continues to be an abundance of agriculture 
lenders locally and across the Nation that are willing and able 
to lend to qualifying ag credits.
    And lastly, the banking crisis we are facing as a Nation at 
present is not the result of a bad ag economy or bad ag loans. 
New Frontier borrowers are not representative of the industry 
at large.
    In conclusion, there is not a shortage of available ag 
credit for those operations with reasonable debt levels and who 
meet normal industry standards for creditworthiness in 
underwriting. TARP money will have little impact.
    TARP certainly may be warranted and justified for certain 
banks that are experiencing weak capital positions. I would 
suggest to this panel that you use the same sound judgment that 
good banks must use with their customers and selectively help 
those banks that can survive. A Government handout to weak and 
failing banks only creates a false economy within the banking 
industry and that comes at the taxpayers' expense.
    Finally, I offer my condolences to those people impacted by 
the gross mismanagement of New Frontier Bank. Perhaps another 
congressional hearing should be conducted to determine how New 
Frontier Bank management and the regulators failed to protect 
the borrowers, the shareholders, taxpayers, and the community 
at large.
    Thank you for allowing me to comment.
    [The prepared statement of Mr. Ochsner follows:]
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    Ms. Warren. Thank you very much, Mr. Ochsner.
    If you do not mind, we are going to have some questions 
just so we can learn a bit more while you are here.
    Can I start with you, Superintendent Neiman?
    Mr. Neiman. Thank you.
    I thought I would start by focusing on--a number of you 
have mentioned the restructuring/modification process, 
particularly Mr. Scuse and Mr. Flesher. I would like you both 
to expand on it. My understanding is that under the Farm 
Service Agency's program, there are a number of protocols, 
including shared appreciation, that kick in only upon 
delinquencies. My understanding under the Farm Credit System--
and I was quite impressed by the set of protocols that you 
outlined--even include pre-foreclosure notices.
    So I would like you both to comment, if you can, on the 
programs, as well as on the success rates of those 
modifications. Have I correctly interpreted those two programs, 
one, that they are dependent--under the FSA program, that it is 
dependent on the borrower being delinquent and under the farm 
credit system, the borrower who may be current but facing 
problems?
    Mr. Scuse. As in my statement, if a borrower does fall into 
financial distress, they can receive lower interest rates. They 
can have their loans rescheduled and get up to a 5-year 
deferral of payments or, in extreme cases, get some of their 
debt reduced. Now, out of approximately 70,000 direct operating 
loans that FSA has in the United States, only about 170 per 
year actually go into foreclosure, and that number has been 
fairly steady over the last 3 years.
    Now, because of the financial distress in the agriculture 
community, there is a very good likelihood that that may 
increase, but we do work with the borrowers to try to limit 
those numbers.
    Mr. Neiman. So of the 70,000 operating loans, how many have 
availed themselves of this modification process?
    Mr. Scuse. I do not have that number for you, but I will be 
more than glad to get it for you.
    Mr. Neiman. And do you track also re-default rates? That 
has been a major issue on the residential mortgage side. After 
modifications, there is still a high frequency of re-defaults.
    Mr. Wall. There are not a lot of re-defaults----
    Ms. Warren. If you could identify yourself just so we will 
have a record. It is fine. You are welcome to be----
    Mr. Wall. I am Gary Wall, acting State Executive Director 
for Colorado for Farm Service Agency.
    Ms. Warren. Thank you, Mr. Wall. If you could help us with 
the question.
    Mr. Wall. I can state for Colorado on the restructures, 
after the loan is restructured, there are not a lot of accounts 
that go delinquent again because it is based on cash flow and 
history. We look at the history of that operation to determine 
what the history has been over the past and their yields and 
their income and their expenses. So after you work through 
those numbers and get it down to what they can actually cash 
flow to write off debt, defer, or whatever, they seem to 
continue on after you do it.
    Ms. Warren. Can I just ask because I just want to make sure 
I am following?
    Mr. Neiman. Go ahead and follow up. Yes, please.
    Ms. Warren. So you are using a combination. You are not 
only writing down the interest rates, you also sometimes are 
writing down principal. Is that right?
    Mr. Wall. We can write down principal. Correct.
    Ms. Warren. So you have the option to do both of those 
until you get something----
    Mr. Wall. The value of the security--for example, I have 
got a $100,000 loan and their security for depreciation is 
worth about $80,000. We can write off that $20,000.
    Ms. Warren. I see. So you, I take it, do not have many 
loans that post-restructuring are under water in terms of 
negative equity, even though they might be cash flow 
manageable.
    Mr. Wall. Not in the last 5 years. In the past, there have 
been some that the equity went down because of different 
circumstances, yes.
    Mr. Neiman. And the interesting thing about that program, 
if I understand it, is that when you do write down the 
principal, there is a shared appreciation agreement so that the 
Government shares in the upside.
    Mr. Wall. If it is secured by real estate. If it is the 
security on chattels, which is the machinery and equipment, the 
equipment is worth what it is today. So if you write it down, 
that debt goes away.
    Ms. Warren. There is no shared appreciation in most farm 
equipment. Right?
    Mr. Scuse. Exactly. If there is an appreciation in real 
estate, then that value is shared.
    Mr. Neiman. So let me switch over to the Farm Credit System 
to understand the distinctions and the process. At the State 
level, we are familiar with a pre-foreclosure notice, and that 
could go out to borrowers early in the process. What is the 
success rate with that program?
    Mr. Flesher. You are correct. Our approach can be two-
pronged. Obviously, a delinquency may trigger our borrower 
rights program and notification that we consider the loan to be 
in distress, and then we begin the process of letting the folks 
know that they have the opportunity to apply for restructuring, 
and we provide them all the material for that.
    But delinquency is not required in order to begin that 
process. It may be, to use an example, we have a major 
hailstorm in a particular area of our territory, and we know 
that the crop loss is significant, possibly total. Well, 
obviously, that becomes a distressed loan, and then we begin 
the process early on of sitting down and trying to anticipate 
how that individual will be able to continue to service that 
particular loan. So we at times are reactive, but we at times 
are very proactive in the process as well.
    Our success rate has been quite good. In the Mountain 
Plains territory, in the past 18 months, we have only initiated 
one foreclosure action and we have restructured 17 loans, and 
that is over an 18-month period of time. I am pleased to tell 
you that all 17 of those restructures are performing today.
    Mr. Neiman. From the residential side, we have seen 
nationwide the difficulty in borrowers responding to these pre-
foreclosure notices. How would you characterize the response 
rate from agricultural loans in terms of either being proactive 
in reaching out to the bank or reactive in responding to your 
notices?
    Mr. Flesher. Generally we find the borrowers to be 
proactive in sitting down with us. The process of applying for 
a restructure, Mr. Neiman, is not a one-sided dialogue. It is a 
negotiation. Our intent is to return the operation to 
profitability. We can do it on a least-cost basis. We want to 
see that loan restructured to return that operation to 
profitability. So even if a borrower does not respond back to 
us, the regulations give us the opportunity to initiate a 
recommendation with regard to restructuring a loan. Now, the 
customer may or may not accept that recommendation and may not 
be interested, and then, of course, we are left with the 
ultimate road to foreclosure. But even if we do not hear back 
from a customer, we have the ability to be able to sit down and 
to recommend a possible restructuring plan to help them with 
their situation.
    Ms. Warren. Well, I was just going to ask do you want to 
ask Mr. Ochsner?
    Mr. Neiman. Yes. As a matter of fact, that was the lead-in 
to my next question. Are these protocols and restructuring 
processes unique to a cooperative association, or do you think 
that they can be adopted by commercial banks outside of the 
Farm Credit System? And maybe that is more directed to Mr. 
Ochsner.
    Mr. Ochsner. Sure. I think there is somewhat of a 
misconception within the independent banking world that a good 
bank stays with that borrower until they no longer can survive, 
and that is a misconception. A good bank is giving counsel 
along the way. I think there are instances when you have a 
disastrous hailstorm where a good credit quality loan can 
deteriorate quickly. In general, there are warning signs, and I 
believe most of the smaller independent banks are involved in 
counseling those borrowers as the credit deteriorates and looks 
at different alternatives.
    The system in place currently with Farm Service Agency has 
been a big help for independent banks to utilize the existing 
loan programs that are there for both borrowers that are 
distressed and that have had deterioration in their ability to 
survive.
    Ms. Warren. Could I ask a follow-up question with that?
    Mr. Neiman. Yes.
    Ms. Warren. Because I would just like to stay with this for 
just a moment, Mr. Ochsner.
    That is, when you do a farm loan restructuring, about how 
long does it take? And I do not mean that in terms of months or 
weeks, but I mean it in terms of how many person-hours at each 
opportunity. I am really asking the question about the 
investment of resources required to do a restructuring. It may 
be appropriate for Mr. Flesher as well. But if you could just 
help us understand that a little bit.
    Mr. Ochsner. Sure. In a smaller independent bank, the 
restructuring process is dynamic over the course of a week or 
two possibly as you meet with that customer, but it is not a 
lengthy process by any means. I would suggest that you look at 
the alternatives that are available and you approach those. 
Oftentimes, there are limited alternatives. If you choose the 
path to use Farm Service as an instrument to help you, then 
that can take, obviously, a little bit longer until you prepare 
the paperwork necessary for that process.
    Ms. Warren. Mr. Flesher, can you help a little bit there?
    Mr. Flesher. You know, the best answer I can give you is 
that it depends on the individual that you are working with. We 
have had some situations where the borrower was very proactive, 
was very quick to provide us all of the appropriate financial 
information that we needed in order to make a decision. 
Obviously, the time that we spent--the administrative costs--I 
mean, beyond legal fees and then, of course, if in fact we are 
going to restructure, we also look at costs of liquidation 
because that is a possible alternative as well. So in this 
least-cost analysis, the time that we spend is kind of factored 
in with part of that number. But it is important to understand 
that a lot of it is predicated upon the willingness of the 
borrower to want to sit down to negotiate a restructuring 
package that we are comfortable with and that they are 
comfortable with.
    Ms. Warren. Right.
    Did you want to add?
    Mr. Neiman. I'll just frame it just a little bit. There is 
a real question in home mortgage foreclosures and small 
business foreclosures. We are not facing a handful. We are 
talking huge numbers right now. And the question is whether or 
not servicers in many cases are adequately prepared to spend 
the time that is necessary for restructuring. I recognize 
something is different about restructuring loans, particularly 
when you are restructuring a loan for a farming operation, but 
perhaps more akin to small business restructuring. But I was 
really just trying to get a sense, when I am hearing from 
people, as I am at this table, who engage in successful 
restructuring--some sense of the time involved because it tells 
us something about what may be needed elsewhere in the economy 
where, at least right now, we may not be quite so successful in 
negotiating restructurings that are not ending up in re-
defaults quickly.
    So if any of you actually have comments on that from having 
experienced on either side. Mr. Arnusch.
    Mr. Arnusch. Well, I think Mr. Flesher hit the nail 
squarely on the head. I think it all, in my mind, boils down to 
that communication between the individual applying for that 
loan or needing of that restructure and the bank's willingness 
and ability to help them identify that in advance of these pre-
delinquent notifications. From my perspective, by the time you 
receive a pre-delinquent notification, the problem is 
significant. In situations where a Farm Credit Service or an 
independent bank could help the individual identify those needs 
of restructuring to ease the cash flow issues, I think it all 
boils down to that communication and the ability for the lender 
and the lendee to be on that same page and understand the 
operation thoroughly. That in my mind is really the success 
that I talked about in my opening statement as far as being 
able to identify the ways and means to smartly restructure 
debt.
    Ms. Warren. That is helpful.
    Mr. Silvers.
    Mr. Silvers. I want to turn from the process of 
restructuring loans to the basic economics of the question I 
think that a number of you have addressed. I am going to start 
with Mr. Flesher, but I would welcome other people's comments 
after he answers.
    It is a major issue throughout the financial crisis that 
banks are holding assets which, if liquidated, are deeply 
insufficient to cover the loans they have made, and the process 
of liquidation does profound social damage. By social damage, I 
mean destruction of communities and neighborhoods. I do not 
think there is anything that makes the agricultural 
circumstances particularly different.
    In fact, as I listened to the testimony today, it occurs to 
me that the kinds of businesses Mr. Arnusch and Mr. Hardesty 
run are put of an auction block tomorrow morning in the context 
of, for example, the crisis of the dairy industry, and might 
fetch considerably smaller prices than they were thought to be 
worth as collateral, say, 2 or 3 years ago. And the 
implications of this are very profound if that is true because 
it changes the nature of the options facing a banker such as 
Mr. Ochsner.
    So, Mr. Flesher, I wonder if you could begin by talking 
about your sense of this question. From the perspective of the 
bank, the lender, is foreclosure of a troubled farm or 
agricultural business--I am not sure what Mr. Arnusch described 
as farm quite captures this--is that really the smart play in 
most instances?
    Mr. Flesher. As I mentioned in my testimony, part of our 
process is sitting down and taking a look at a least-cost 
analysis in that process.
    Mr. Silvers. And what do you find in that? Is there a rule 
of thumb here? In residential mortgages, there is kind of a 
rule of thumb, that foreclosures pull about 30 to 40 percent of 
the loan. That is what you realize. Is there any rule of thumb 
in agricultural lending?
    Mr. Flesher. There is not because every agricultural 
operation is very different based on, obviously, their 
diversity, the size, the types of commodities that they are 
involved in.
    You know, when we sit down and take a look at an operation 
that is distressed, obviously, foreclosure is not the first 
thing on our mind. It is the last thing on our mind. We have a 
strong desire under our borrower rights program to be able to, 
as I said, return those operations to profitability.
    I think what is key in agricultural lending versus other 
types of lending that you have referred to--within agricultural 
lending, we build relationships up front. When we make loans 
initially with a customer, it must be, as I said in my 
testimony, a sound loan, just as if we restructure an existing 
loan that has become distressed. It still must be a sound loan. 
Wanting to extend credit beyond the means of an operator is not 
prudent for the customer nor for the lender.
    So when you talk about lending in agriculture, the 
relationship, the understanding of the inordinate risks 
involved in agriculture, which are very peculiar to 
agriculture, as compared to other types of lending, the ones 
you have referred to, all of those things are factored into our 
credit standards, into the decisions that we make, into the way 
that we structure our loans, as Mr. Hardesty referred to with 
regard to short, intermediate, and long-term credit and so 
forth.
    So there really is no simple answer, Mr. Silvers, to your 
question other than, again, if we go into the process in a 
proactive way, wanting as our goal to be able to return the 
operation to profitability, then as I shared with you, in the 
past 18 months, there has only been one loan that we had to 
call to foreclosure. The other 17 we were able to restructure.
    Mr. Silvers. I am a sort of simple person in certain 
respects. So I am going to push for a simple answer. It appears 
to me from what you have said that in general your approach to 
troubled loans is foreclosure is not the last resort because 
you are generous and charitable-minded folks. It is the last 
resort because generally there is a better outcome for the 
lender in some sort of restructuring if you can get the sort of 
communication that Mr. Arnusch and other witnesses referred to. 
That seems like a simple proposition. Is that proposition 
correct?
    Mr. Flesher. I think so.
    Mr. Silvers. You think so. I got a simple answer.
    Ms. Warren. I think you are getting some agreement from Mr. 
Ochsner as well and Mr. Hardesty.
    Mr. Hardesty. If I may add to that just briefly here, you 
talked about the asset value being diminished from two to three 
years ago. In the dairy industry, I would say it is diminished 
from six months ago. Many of our producers, if this crisis 
would have hit six months ago or six months from now, would not 
find themselves in the position that they are in today because 
of this extreme devaluation of assets. Our farmers do not want 
a bailout. They just want an opportunity to succeed, and by 
restructuring and doing some of those things, I think that 
affords them an opportunity.
    Ms. Warren. Mr. Ochsner.
    Mr. Ochsner. Mr. Silvers, to accurately answer your 
question, I would like to, first of all, differentiate between 
housing and the ag sector. I do not believe anyone saw the 
significant drop in housing values coming. Historically prudent 
lending would suggest that you margin a loan, whether it is an 
ag loan or a housing loan, and you loan a certain percentage. 
In the housing industry, we typically over history have not 
seen drops in the values, and so a higher percentage has been 
acceptable.
    However, in the ag industry, it is cyclical and good, 
prudent ag lenders have created a larger buffer, if you will, 
or a margin. In other words, if a cow is worth $1,500, they 
would loan 70 percent of that cow, knowing full well that 
cycles will occur where that cow may be worth $1,800, but still 
leaving that margin in place and utilizing a more stabilized 
value over time rather than wagging the tail up to a $2,500 
value and then loaning 80 or 90 percent because the industry is 
experiencing great times.
    Mr. Silvers. But, Mr. Ochsner, I am not sure you are 
addressing my question. Let me explain why.
    I do not disagree with your basic analysis that imprudent 
lending standards did a great deal of damage and that in a 
cyclical business such as agriculture that you want to have a 
significant capital cushion. I do think that housing is nowhere 
near as stable as you suggest it is, at least in many of our 
major markets. But that is not really here nor there for this 
conversation. I agree with that proposition.
    The question is, what do we do now in relation to loans 
that may have been imprudently underwritten where the choices 
now are choices between restructuring and liquidation, where we 
cannot rewind the clock.
    Mr. Ochsner. The options are limited.
    Mr. Silvers. Do you disagree with Mr. Flesher's observation 
ultimately that as a general proposition, you can get better 
value out of a restructuring than out of a liquidation?
    Mr. Ochsner. It would depend on a case-by-case basis.
    Mr. Silvers. I mean, obviously, there are circumstances 
that are hopeless, and there are circumstances where continuing 
down the road is just going to make it worse in the end. I 
agree with you there.
    But my question is looking across the totality of the ag 
lending environment, when you were faced with a situation that 
maybe you would like to hit rewind, but you cannot, is it the 
case in total, that there are more circumstances where 
restructuring would work out better for the lender than 
foreclosure?
    Mr. Ochsner. I do not know that I can answer that 
definitively. I am a small business owner and I have to, as Mr. 
Flesher said, analyze the least-cost alternative. If 
foreclosure and liquidation is the least costly alternative, 
then unfortunately that may be the alternative.
    Mr. Silvers. In your experience, is foreclosure generally 
the least-cost alternative?
    Mr. Ochsner. Again, I cannot answer that.
    Mr. Silvers. Well, surely you have----
    Mr. Ochsner. It is case by case based on the operations. My 
experience with the operations that I have dealt with----
    Mr. Silvers. Right. Yes, that is what I am asking.
    Mr. Ochsner [continuing]. in which we have tried to apply 
prudent lending standards, we have not experienced foreclosure 
in very many opportunities at all. Generally, we restructure 
through Farm Credit or Farm Service Agency. So I guess the 
answer to your question is restructuring would probably be a 
more viable alternative.
    Mr. Silvers. Thank you.
    Ms. Warren. I want to follow up in a slightly different 
direction if I can on this, and this is a question about--I am 
not sure if the right way to frame this is a big bank/small 
bank question or if this is better framed as a standardization 
in lending models and standardization in dealing with 
distressed loans versus a kind of handcrafted model. But we 
have been having a series of field hearings. We have been to a 
lot of different places hearing about different kinds of 
problems. But I would welcome your thoughts and your comments 
on this.
    It seems to me, although I read very formal discussion of 
this, there seem to be two kinds of lending models that have 
emerged over the past perhaps dozen years or so. One that is 
very standardized. Let me know your ZIP code. Let me know your 
income, and I know how much to lend. And I must say it is not a 
notion that excessive lending does not help customers. The 
notion is the customer knows how much the customer should 
borrow and our job is just to make as much that available as 
possible versus this kind of handcrafted lending that you talk 
about.
    And so I have two questions. First, do you see this 
divergence in lending? Maybe it is three questions.
    The second is how much in the ag lending market would you 
say falls into one category or the other? Is it really all in 
the handcrafted, what I was calling the smaller bank model? Is 
that where ag lending really is right now, or is a portion of 
it somewhere else?
    And any speculation on the consequences of that?
    I would welcome comments from anyone who seems to inclined 
to start. Mr. Ochsner, you seem ready to go on that.
    Mr. Ochsner. I do not believe that there is a difference. I 
believe that sound underwriting is very much the same at the 
small, independent level as it is at the Farm Credit level. I 
would suggest that most small, independent banks use the same 
exact standards.
    Ms. Warren. As, say, Wells Fargo or----
    Mr. Ochsner. Absolutely, yes.
    Ms. Warren. Okay.
    Mr. Flesher.
    Mr. Flesher. Madam Chairman, I believe that generally when 
you take a look at community banks and most regional banks 
across the country, they are more, shall we say, relationship-
oriented and, by virtue of that, more hands-on in their 
customer relationship, their lending practices, their 
understanding of the businesses that they are lending money to. 
You take a look at, I think, some of the very large banks in 
this country, the ones that have been dubbed as ``too big to 
fail,'' I am not sure that the personal high-touch business 
model that Mr. Ochsner and myself are familiar with is one that 
has been readily embraced by those larger banks.
    Ms. Warren. Go ahead, Damon.
    Mr. Silvers. I would like to follow up on this theme of big 
and small banks and in a somewhat different way. I mean, I 
think this is a theme that we have seen in other credit 
markets. I think Mr. Ochsner's description of having money to 
lend is not unusual in the community bank sector today of 
people who know their customers and are close to them, as Mr. 
Flesher described.
    But I am interested in two things. I want to begin with Mr. 
Scuse. You described a dramatic escalation in people coming to 
your agency for loans. How do you apportion the cause of that 
as between the deteriorating credit quality of farm borrowers 
and the withdrawal of credit from the agricultural market by 
financial institutions for whatever reason? What do you see as 
the balance there?
    Mr. Scuse. I think it is both. I think you are seeing right 
now across the entire United States from coast to coast--it 
does not matter what type of agriculture you are in. I think 
there is a great deal of concern by the lending institutions as 
to the future of agriculture, if you look at what has happened 
to the dairy industry, again, the poultry industry, the swine 
industry, if you look at the decline in prices just in the last 
couple weeks in the commodity markets. So I think there is a 
great deal of concern out there from the banking industry, as 
well as a tremendous deterioration in the equity in 
agriculture. So I think it is a combination of both, not just 
one or the other, but across the entire United States, it is 
pretty much both.
    Mr. Silvers. Now, in this community, northeast Colorado, 
obviously, there has been the collapse of a major agricultural 
lender, perhaps a not particularly responsible one, but 
nonetheless, they are gone.
    We, being the United States, we have put a great deal of 
taxpayer money into a number of large banks of the type that 
Mr. Flesher was describing, some of which are--at least had 
been significant agricultural lenders, including Wells Fargo, 
which I believe is the largest agricultural lender in the 
United States.
    I am asking this of any of you, to the extent you know or 
have any information about this. To what extent are we seeing 
those banks which have been propped up by the United States 
taxpayer coming into this community and replacing the vanished 
credit capacity that we have had here?
    Ms. Warren. Mr. Flesher? Mr. Hardesty, you were reaching 
for the mic.
    Mr. Hardesty. I certainly cannot speak--I do not know how 
some of these large banks operate. Knowing the cast of 
characters in the dairy industry that happened to bank at New 
Frontier Bank, most if not all have been unable to obtain any 
other additional financing, and they have--reportedly--visited 
8, 10, 15 banks and asking for loans. And so I would say that 
from more of a hearsay point of view, as far as the dairy 
industry is concerned, it has not happened.
    Mr. Silvers. I would just follow up on a few things. I 
think there has been a suggestion by Mr. Ochsner that a lot of 
those folks are not going to be able to repay further loans. Is 
that a fair characterization of your testimony, Mr. Ochsner?
    Mr. Ochsner. Yes.
    Mr. Silvers. I would ask you, Mr. Hardesty, if you disagree 
with that characterization of those folks, and secondly, do you 
have any information more broadly? As our Nation's banking 
systems become more concentrated, when we have a problem, 
serious problem with smaller banking institutions, are we 
seeing the big banks stepping up to address whatever there may 
be, small or big, depending on one's assessment of the credit 
quality of the borrowers?
    Mr. Hardesty. Personally I do not differentiate small to 
big. As an ag borrower, I want a relationship with my bank and 
my banker and the person that understands my needs. Period. I 
do not care if they are the smallest bank in town or the 
largest bank in town.
    As far as New Frontier and whether or not those loans are 
bankable, I do not know the circumstances in detail, but I 
really think it is almost a moot point because that water is 
under the bridge. FDIC is in the process of packaging those 
notes, and so that water has already traveled downstream.
    Ms. Warren. We have one more. I am sorry. Mr. Arnusch.
    Mr. Arnusch. I do not know if I can accurately answer the 
question you are asking, but I can tell you that we are seeing 
a concentration in the lending sector for agriculture just as 
we are seeing the concentration of agriculture in general.
    But I wanted to point out this too. We are also seeing a 
lot of our input suppliers to our industry, be it John Deere 
Credit, be it financing options through seed companies, and 
other large companies coming to the plate that have been 
nontraditional lenders in the past. In certain instances, we 
have even seen where companies like John Deere are even 
offering operating credits in limited amounts. And so I would 
suggest that maybe some of these larger firms outside of what 
we would consider large banks are trying to pick up the slack, 
but to say that large banks are not lending to agriculture, I 
cannot go that far.
    Mr. Silvers. But you are seeing people in the trade credit 
business and, as you say, the nontraditional suppliers of 
credit expanding what they are willing to lend on.
    Mr. Arnusch. Absolutely. Sometimes it is somewhat of a 
sales enticement. Often they offer interest rates that are far 
below anything that farm credit or a commercial bank could 
offer, and so there is a hidden strategy there. However, it 
takes the burden off of me, cash flow operations and 
operations----
    Mr. Silvers. From your perspective, a deal is a deal.
    Mr. Arnusch. A deal is a deal so long as you agree with 
what you are buying.
    Mr. Silvers. Thank you.
    Mr. Neiman. Having traveled across country for this 
hearing, I would not want to leave here today without clearly 
understanding recommendations from you all for legislative or 
regulatory change that we can make to Congress in our 
subsequent reports.
    In analyzing the residential mortgage issue, a number of 
the root causes and legislative responses at the Federal and 
State level were clear. We addressed breakdowns in the 
origination process, breakdowns in the securitization process, 
weak underwriting, lack of counseling for borrowers, lack of 
opportunities for modifications.
    Help me understand what we should be recommending to 
Congress. Clearly, I have heard of price supports for 
particular products, but are there other regulatory, structural 
responses with respect to the lending process? Because what I 
highlight on the residential side--many of those issues do not 
appear to exist on the agricultural side. So I would be very 
anxious to hear from all of you specific recommendations that 
we can consider in making our recommendations to Congress.
    Ms. Warren. Mr. Ochsner, would you like to start?
    Mr. Ochsner. Well, I may be the Lone Ranger here, but I 
truly believe we have had a strong economy up to the current 
point in time with certain dynamics like the dairy industry 
that have had their cyclical nature, which occurs.
    Quite frankly, I think the best thing you can do is leave 
the Government out of it and let the true capitalism take its 
course. Let the process happen, and the strong survive. 
Unfortunately, the weak fail. Sometimes those are very good 
people, but there will be another person that will come 
alongside the weak. They will pick them up. They will partner 
with them or they will buy them out, and they will have enough 
money to go home and retire rather than carry on this false 
support that ultimately cripples the industry, whether it is 
agriculture or banking or the Starbucks on the corner. And I 
really believe let us let capitalism work.
    Ms. Warren. Thank you. Mr. Hardesty.
    Mr. Hardesty. Absolutely. In my testimony, I testified as 
Mr. Neiman correctly stated, that a temporary increase in the 
support of CCC purchase price would be a very, very minimal 
cost. On the cheese side, maybe $25 million is our estimate. On 
the powder side, I do not have that number with me. We could 
certainly obtain that number for you. But again, the severity 
of the dairy crisis is unprecedented. And certainly most of our 
dairy farmers are free marketers, but we passed the free 
marketing scenario four or five months ago, as we are nine 
months into this scenario.
    Ms. Warren. Thank you.
    Mr. Flesher.
    Mr. Flesher. Madam Chair, I think it is safe to say that 
communities similar to Greeley, Colorado all across this 
country cannot afford the huge regulatory failure that this 
community experienced. So that would be one recommendation.
    Secondly, I believe that----
    Ms. Warren. Please, I think Mr. Silvers wants----
    Mr. Silvers. Can you be a little bit more specific as to 
what you think the failure was and what should be done 
differently?
    Mr. Flesher. I, obviously, do not have access to the 
reports issued by the regulators of the local community banks 
here, but in my discussions with other community banking 
leaders, I am strongly left with the impression that the 
standards required by one commercial bank were not upheld in 
another commercial bank. And that has led me, Mr. Silvers, to 
believe that that issue needs to be addressed. Again, I do not 
believe communities across this country can withstand this sort 
of thing on an ongoing basis.
    Mr. Neiman. I was also struck in your testimony when you 
said you have not changed or tightened your lending standards, 
and it is quite remarkable when we are aware of banks across 
the country who are increasing underwriting standards to such a 
point where there is a concern that they have gone too far. I 
think it is because of where they may have started from. So you 
may also want to comment on that as well.
    Mr. Flesher. Thank you, Mr. Neiman, for bringing that to 
the hearing today because we are proud of the fact that we have 
not changed our credit standards. We are proud of the fact that 
even though we have received criticisms from time to time 
within our local communities that maybe our credit standards 
were too strict, too conservative, we feel like, based off of 
the degree of risk in the industry that we serve, that our 
credit standards are there to not just protect the institution, 
but are there to help the borrower as well.
    And so my second recommendation is that on a go-forward 
basis, all lenders need to better understand the importance of 
making solid loans from the beginning.
    And then thirdly, we are very proud of our 20-year history 
in the area of borrower rights, and I want this panel to know 
that the program is working for us and it is working for our 
customers because it creates a framework under which everyone 
understands what the rules are. The playing field is level. The 
customer understands their rights and responsibilities. The 
lender also understands the borrower's rights and 
responsibilities. So it creates a wonderful framework for us to 
help resolve situations.
    Mr. Neiman. Do you see that being transmittable to other 
commercial banks----
    Mr. Flesher. Mr. Neiman, that would be a policy decision of 
the U.S. Congress. We are very proud of our 20-year history and 
it is working for us.
    Ms. Warren. Thank you very much.
    Mr. Arnusch.
    Mr. Arnusch. Well, many of my recommendations and thoughts 
and ideas have already been taken.
    But the point I would like to drive home too is, yes, half 
of the equation is certainly the lender, but the other half of 
the equation is the borrower. And agriculture is a changing and 
a complex industry and, with that, must be the evolution of our 
management strategies. There was probably no one more important 
to the success of my operation than my father and my family, 
but I can tell you I manage the day-to-day operations of my 
business so much differently today than my family did. In fact, 
I manage my operation differently than I did just three years 
ago. And until we recognize that it is an industry, I believe 
we will have future hearings such as this. It is an evolution 
process. It is a management process, and quite frankly, it is 
an education process.
    Ms. Warren. Thank you very much, Mr. Arnusch.
    And Mr. Scuse.
    Mr. Scuse. Thank you, Madam Chair.
    As a farmer who just 10 or 12 years ago was very, very 
critical of USDA and its lending policies, I can sit here and 
honestly say that there has been a dramatic turnaround in FSA, 
its loan programs and lending policies. We went from a 
delinquency rate just a few years ago of almost 25 percent to a 
delinquency rate today of just over 1 percent.
    I think we have some very good programs at USDA. We are 
working with those producers that our programs are designed and 
intended for. I think we have some great opportunities out 
there, and our programs in my opinion function in a way that 
they are intended to work.
    You asked me a question earlier this morning about the 
number of loans that we restructured, and I did not have an 
answer for you but I do now. We restructure approximately 2,400 
loans out of the 70,000 per year.
    Mr. Neiman. Thank you for that follow-up, a quick follow-
up.
    Ms. Warren. Thank you very much. That is a very quick 
follow-up.
    Mr. Scuse. Modern technology.
    Ms. Warren. There we go. I love it.
    I want to thank all of the witnesses for sharing your time 
and your thoughts with us today. As I said, your whole 
statement will become part of the public record, as well as 
your oral statements and our dialogue here. We really 
appreciate your taking the time to do this.
    I want to say we also invited another very large financial 
institution to join us, and they would not. And I appreciate 
your coming and doing this. It takes your time and your energy, 
and we are all grateful as part of this panel.
    This panel is now excused.
    Before we adjourn this hearing, however, we want to take 
time for members of the audience, if you wish to speak to us. 
The way we are going to do it is if you will take the podium 
over here and make a line just back from there behind the 
podium. I am going to ask that people keep their comments 
short. We are going to try to keep these to a minute each just 
so we can hear from the maximum number of people. And Mr. 
McGreevy will hold up a stop sign when it is appropriate.
    But we do want a chance to hear from everyone, and I want 
to be clear, what you have to say becomes part of the public 
record of this hearing. So we welcome your thoughts. So if you 
would identify yourself please, and we are here to hear your 
comments.
    Mr. Gallatin. Thank you. My name is Loyal Gallatin. I am an 
owner of a construction company here in Greeley. So I am kind 
of a little bit out of the scope of your discussion here. 
However, this kind of highlights the situation that we are in 
as construction and small business people here in Greeley.
    We do not have these people as resources for financial 
assistance to restructure our loans. I have been to 24 
financial institutions and have been denied 24 times. I do not 
understand that.
    All of my construction loans have gone since the FDIC took 
over New Frontier Bank. I did not default this institution. I 
did not. My loans were in good standing when this bank was 
seized by the FDIC. The FDIC is telling me you have 30 to 60 
days to restructure this, your loans. The FDIC has told me 
themselves we know there is no money available for you to do 
that.
    So what do I do? I mean, in my case, are me and my family 
as a small business forced to file bankruptcy both on my 
business and personal and everything I have worked for is gone? 
I do not think that is true.
    I am kind of out of the realm here. I am not a farmer. I am 
not a dairyman, but I have just as much of an impact on this 
community as these gentlemen do. One of our representatives 
from Morgan County stated that she had six people that had a 
$40 million impact on the economy. That is six people. I am one 
person. I probably have a $6 million or $7 million impact on 
this community.
    So I just want you to know that it is just not all about 
ag, even though it is important. There is no doubt about it. 
There are others that are affected here as well.
    Ms. Warren. I appreciate Mr. Gallatin. One of the points of 
the field hearings is to get at least some sense of the impact 
on communities and we recognize it goes far beyond those who 
are in the direct business of producing agriculture. Thank you 
very much.
    Yes, sir.
    Mr. McAllister. Thank you, ma'am. Respected members and 
chairperson, I am Darrell McAllister. I am CEO of Bank of 
Choice of Greeley. Bank of Choice is a $1.2 billion bank. We 
are not Wells Fargo, but we are larger than the current bank 
here today.
    I think the question in northern Colorado is that banks and 
northern Colorado have adequate capital. With the closure of 
New Frontier Bank, $160 million in capital was vaporized. That 
is $1.6 billion in lending capacity. New West Bank, which is a 
very good quality, small bank here today, had as of their call 
report on 3/31 $7.4 billion--or excuse me--million in capital. 
You basically need more than 20 banks of their size to replace 
the capital that left this area.
    They said they have 20 percent of their loans in ag loans. 
As the call report showed, they have $70 million in loans. That 
would mean they have about $14 million in ag loans today.
    Our bank has refused to look at new loans because we just 
basically are not well capitalized enough. We are well 
capitalized, but not under the new standards that have taken it 
up to 12 percent. And we would wrap up too much of our capital. 
But we have turned down the chance to look at $15 million loans 
at this point in time just because we would be wasting our 
customer's time.
    Without capital, it is hard to move forward. Capital is 
key. Without TARP funds for banks, does not make a bad loan 
good. Without capital, whether it is from TARP or other, 
attempts to lend in this community for many of the banks are 
impossible.
    Ms. Warren. Thank you very much. I appreciate that. It is 
very important.
    Mr. Silvers. Thank you for coming.
    Ms. Warren. Yes, ma'am.
    Ms. Siddell. My name is Cindy Siddell. I am one of those 
third-generation exiting farmer people who have sons actively 
involved and were impacted by Frontier Bank. I have some 
grandsons and grandson-in-laws actively involved in 
agriculture. In our family, each son, grandson, and sons who 
are in partnership have found and secured separate lines of 
credit, but they work together as a unified whole. My husband 
and I have been involved in agriculture for over 52 years and 
have been customers of the various ag lending entities over 
that period of time.
    And I would like to make the remark that the situation at 
Frontier Bank was predicated by the fact that a bank before 
them, Centennial Bank, sold out and that ag lending basis 
evaporated, vaporized. In its place, many of the other small 
banks were lending very cautiously, Bank of Choice and West. In 
that vacuum, New Frontier stepped forward and actively courted 
a number of the larger agriculture entities to get their 
business. And then we had this scenario of perhaps one very 
large operator in a very volatile dairy industry toppled, and 
the row of dominoes went down.
    So with that, I would like to conclude that most farmers 
and ranchers prefer to have that very intimate, knowledgeable 
relationship with their banker. They like to deal with the 
smaller independent banks. What the solution is I do not know, 
but we need more free credit. We need more banking 
organizations, perhaps the credit unions, to be freed up in the 
kind of loans that they can make so that those viable operators 
can continue to operate.
    Thank you.
    Ms. Warren. Thank you, Ms. Siddell.
    Yes, sir.
    Mr. Sponsler. Hi. My name is Mark Sponsler. I serve as the 
Executive Director for the Colorado Corn Growers Association 
and the Colorado Corn Administrative Committee, among other 
roles. But I want to be clear that I am not speaking on their 
behalf, but in that role, it has put me directly in the middle 
of many of these types of meetings and I have been following 
the issue very closely. So I speak personally as an incurable 
agriculturalist who grew up in the Midwest and has been 
fortunate enough to spend more time in Colorado agriculture 
than in my home State of Iowa.
    But I want to emphasize some points that I heard today that 
I think really bear emphasizing, and one of those primarily was 
brought forward by Mr. Hardesty. And I very much appreciate the 
quest of Mr. Silvers to drill into the better of two options 
regarding foreclosure versus restructuring and specifically 
what he referred to as the profound social damage done by 
restructuring.
    As Mr. Hardesty said, these are unprecedented times in 
terms of the livestock industry, particularly dairy, for what 
is understood to be cyclical but the extremes of that cyclical 
cycle have bounded further than ever before in history. And I 
would ask that special consideration be given to the fact of 
these unprecedented times and the fact that unprecedented 
measures may be appropriate given the immense impact on both 
food security, national security, and safety that those 
products provide us.
    Thank you.
    Ms. Warren. Thank you very much, Mr. Sponsler. I appreciate 
your coming.
    Yes, sir.
    Mr. Reimer. My name is Dean Reimer. Basically I have been a 
resident of Colorado all my life. And I am kind of from an ag 
background, but I am an investment counselor now basically.
    What bothers me is it seems like there is a lot of 
discrimination between large banks and small banks. I have been 
an investor in small banks. And I think a lot of it pertains to 
exactly who is servicing loans, especially in the mortgage 
area, and personal contact between bankers and their customers. 
And it seems like that there has been a failure of a lot of the 
government agencies, the SEC in particular, with oversight in a 
lot of these issues.
    All I am trying to say is that it seems like, to me, that 
the compensation and the nationalization, I guess you might 
say, of the large banks by the Government--and that is pretty 
much what they did. They are taking over major ownership of a 
lot of these institutions. That discriminates a lot against 
community small business and community banks and that sort of 
thing.
    And this does not have a lot to do with agriculture, but 
because that is more of a personal business. And the large 
banks, I do not think, want that business because they do not 
understand it. They just want large loans to large 
institutions.
    So all I am trying to say is I think the discrimination 
against smaller institutions, raising capital requirements 
like, for instance, is something when a distressed bank is in 
trouble that is completely wrong because all you are doing is 
causing a larger problem.
    Ms. Warren. Thank you very much, Mr. Reimer. Thank you.
    One more.
    Ms. Rodriguez. I want to go last.
    Ms. Warren. Yes. Rosemary Rodriguez. That is right. Do we 
have anyone else who wanted to comment? Please, ma'am.
    Ms. Hurston. Hi. I am Deb Hurston, and my husband and I had 
a dream for years of setting up a farm, and we came to Colorado 
specifically for that from Georgia.
    I heard you ask for recommendations to take, and I did not 
hear a lot of recommendations. I heard a lot of self-
proclamation, but I did not hear a lot of recommendations. And 
there is one recommendation that I will make. When the FDIC 
comes in and takes over a bank, particularly an ag bank, please 
do not do it as the timing was for this FDIC takeover because 
now I should be focused on my crop. I am crop. I am not dairy. 
I am crop. I should be focusing on my crop and getting my 
farm--making it profitable for the year. Instead, my focus is 
on refinancing the debt that I had with New Frontier.
    They are exactly right in that ag lending is different. I 
have been in lending for all my adult life, but ag lending is 
different. You have to take the time to build that relationship 
with that bank, and when the FDIC comes in and says you have 
this amount of time, it takes time to build a relationship with 
a bank in order for them to take your loan. So we are 
feverishly working with a community bank who is trying to do 
that.
    My other point is that if the FDIC has to sell my loan to 
somebody, they are not going to get 100 percent of that loan. 
We talked about residential, 30 to 40 percent as the rule of 
thumb. I do not know what it is with ag, but it is not 100 
percent. So why is the FDIC putting us through filling out 
paperwork like this and going through all of these hoops when I 
am offering them 80 percent of the loan. I can fairly readily 
get the financing for 80 percent, and I am hitting all these 
roadblocks. So there needs to be something there in that 
regard.
    So the timing for a takeover is crucial. This is not a 
local Federal savings and loan. This is ag. They need to take 
that into consideration before they step in and do something 
like this because it does take a lot more time to build a 
relationship with a bank who will come in and take over your 
loan.
    Ms. Warren. Thank you very much. I appreciate your coming, 
Ms. Hurston.
    Is there anyone else before we go to Ms. Corwin. Is this 
Mr. Bennett? Is that right?
    Mr. Bennett. Yes.
    Ms. Warren. So we will do Ms. Corwin and then Mr. Bennett. 
Ms. Corwin.
    Ms. Rodriguez. My name is Rosemary Rodriguez. I am the 
State Director for Senator Michael Bennet. Meg Corwin is our 
regional representative.
    Ms. Warren. Oh, I am sorry.
    Ms. Rodriguez. She is in the room today and has worked with 
a number of folks in this area for quite a long time. But 
lately a great deal of her time is spent on dealing with the 
banking issues.
    Senator Michael Bennet is a member of the Banking Committee 
and he is a member of the Agriculture Committee. So we are 
definitely on his field today. He greatly regrets that he 
cannot be here personally but asked me to say a couple of 
things, and first of all, state the obvious, that times are 
tough right now in this country and in our State and especially 
here in northeastern Colorado.
    On his behalf, I want to thank the members of the TARP 
oversight panel for listening to the testimony today and to the 
people of this community.
    I would like to acknowledge the local residents who have 
taken their time to address this panel. Their voices need to be 
heard. This is an opportunity for you to learn more about the 
dire situation faced by people who depend on agricultural 
lending as we struggle through this deep and painful recession.
    The TARP does need oversight. These Coloradans can tell you 
firsthand what is broken now. Wall Street and the biggest banks 
in the world have gotten every benefit that Washington has had 
to offer, but rural America has not fared as well.
    The April 10th closure of the New Frontier Bank created an 
urgent need for credit that is felt throughout this local 
economy. Greeley is a proud community and it says something 
about how difficult things are that people are here today 
asking for your consideration. I hope you will return to 
Washington and convey our collective message. TARP should also 
be about rural America and working families, community banks, 
and average taxpayers, not just about big New York banks.
    Senator Bennet, Senator Udall, and Congresswoman Markey 
have reached out to various members and received a good 
response from a number of members that I have outlined in the 
written testimony. That is the past.
    At this point, we need to focus on how we move forward. You 
will be doing this community and this country a great service 
if you take what you have heard today back to Washington. The 
situation in Greeley is a perfect example of the program's 
limitations, namely: one, it has mostly ignored the needs of 
community banks and credit unions; two, it has mostly ignored 
whole sectors of this economy that are critical to recovery, 
especially agriculture; and three, it has mostly ignored the 
direct needs of the middle class such as borrowers here today 
who paid on time and lost their loans through no fault of their 
own.
    Colorado families deserve better than this from their 
Government. Taxpayers such as the farmers and entrepreneurs in 
this community deserve a better return on their investments and 
so do our smaller banks. The livelihoods of Coloradans are at 
stake and the manner in which we resolve the situation will 
have a ripple effect throughout all of northern Colorado.
    One thing he learned during his two prior trips here in 
April is that the best ammunition he has as a Member of 
Congress is the individual stories that people here today have. 
Senator Bennet would encourage all of you to continue to work 
with Meg Corwin and share your stories so that we can take them 
back to Washington. If TARP cannot work for communities like 
this one, then what good is it?
    Thank you for coming.
    [The prepared statement of Mr. Bennet follows:]
    [GRAPHIC] [TIFF OMITTED] 51741A.033
    
    [GRAPHIC] [TIFF OMITTED] 51741A.034
    
    Ms. Warren. Thank you again, Ms. Rodriguez. Thank you, Ms. 
Corwin, too.
    Mr. Bennett, I think is our last speaker for the day.
    Mr. Bennett. Thank you very much. I am Ken Bennett. I am 
the District Director for Congresswoman Betsy Markey, and she 
too would love to be here today but she is working in 
Washington, D.C. right now.
    She asked that I relay to you her thanks for the work the 
panel is doing, witnesses, and all the attendees and the 
citizens paying attention to this serious issue. I know she has 
been very focused on this. She wrote a letter to Secretary of 
Agriculture Vilsack on this. She has spoken directly with the 
chair of the FDIC, and she has been working with Treasury to 
move towards solutions.
    We appreciate that you are taking the time to understand 
the seriousness of the issue, the impact that this has on our 
agriculture industry, the impact it has on hard-working 
American families, and as others have said, the ripple effect, 
the impact it has on the economy throughout our entire region 
here.
    She asked me to convey to you her appreciation to the panel 
for your investigation, for your questioning, for seeking 
effective ways of using our taxpayer dollars in helping us move 
forward on solutions.
    Thank you very much.
    Ms. Warren. Thank you, Mr. Bennett. I appreciate it.
    So this hearing is about to adjourn. I just want to say how 
much we appreciate your coming, how much we appreciate those 
who came and testified. Thank you. Those who gave us public 
comment. Very valuable. And just those who came to be part of 
this process.
    What happened here today will become part of our report on 
farm credit, which will come out near the end of this month.
    In addition, what happened here today will also help inform 
all of our work in the Congressional Oversight Panel's analysis 
of Treasury's execution of the Troubled Asset Relief Program. 
So it becomes valuable not only for the specialized report on 
agriculture, but for all of our reports.
    I also want to say we are in communication with the FDIC, 
and we intend to follow up with the FDIC on what we have 
learned here today. We will have additional conversations both 
on a formal and an informal basis to make sure that what we 
have heard is communicated as clearly as possible back in 
Washington.
    So with that, again, the Congressional Oversight Panel 
offers its thanks for your hospitality and this meeting is 
adjourned.
    [Whereupon, at 11:57 a.m., the hearing was adjourned.]

                                  
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