[JPRT, 111th Congress]
[From the U.S. Government Publishing Office]


 
                     CONGRESSIONAL OVERSIGHT PANEL 

                               ----------                              

                             SPECIAL REPORT

                               ----------                              

                       FARM LOAN RESTRUCTURING *

                [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                 July 21, 2009.--Ordered to be printed

 * Submitted under Section 501 of Title 5 of the Helping Families Save 
              Their Homes Act of 2009, Pub. L. No. 111-22




















              CONGRESSIONAL OVERSIGHT PANEL SPECIAL REPORT
                       ON FARM LOAN RESTRUCTURING















                     CONGRESSIONAL OVERSIGHT PANEL

                               __________

                             SPECIAL REPORT
                               __________


                       FARM LOAN RESTRUCTURING *

                [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                 July 21, 2009.--Ordered to be printed

 * Submitted under Section 501 of Title 5 of the Helping Families Save 
              Their Homes Act of 2009, Pub. L. No. 111-22

                               ----------

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                            C O N T E N T S

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                                                                   Page
Executive Summary................................................     1
Section One: Special Report on Farm Loan Restructuring...........     5
    A. Introduction..............................................     5
    B. Agriculture Markets Generally.............................     7
    C. Farm Credit Markets.......................................    27
    D. Farm Loan Restructuring...................................    54
    E. Conclusion................................................    91
Section Two: Additional Views....................................    95
    A. Damon Silvers.............................................    95
    B. Congressman Jeb Hensarling and Senator John E. Sununu.....    95
Section Three: About the Congressional Oversight Panel...........    97
======================================================================


               SPECIAL REPORT ON FARM LOAN RESTRUCTURING

                                _______
                                

                 July 21, 2009.--Ordered to be printed

                                _______
                                

                          EXECUTIVE SUMMARY *

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    * The Panel adopted this report with a 3-2 vote on July 20, 2009. 
Senator John E. Sununu and Rep. Jeb Hensarling voted against the 
report. Additional views are available in Section Two.
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    From the earliest days of the Republic, the Jeffersonian 
ideal of the yeoman farmer has held a special place in American 
culture. But the harsh reality of severe droughts, devastating 
floods, and dramatic fluctuations in commodity prices has 
intruded upon the ideal time and time again for those who work 
the land to provide for their families and to feed their 
communities.
    Recognizing the importance of agriculture not only to the 
American identity but to our economy, and acknowledging the 
cyclical nature of the farm sector, Congress has established a 
variety of programs designed to support farmers during the 
painful yet inevitable low ebbs in their business cycles. 
Consequently, as last fall's acute crisis in the financial 
sector gave way to a deep and enduring global recession, 
Congress expressed concern about the ramifications that a 
sustained economic downturn could have for agriculture.
    In response to fears that trends in farm loan delinquencies 
and farm foreclosures could escalate to rival the foreclosure 
crisis in the residential mortgage sector, Congress directed 
the Congressional Oversight Panel to issue a special report 
that analyzes the state of the commercial farm credit markets 
and the use of loan restructuring as an alternative to 
foreclosure by financial institutions receiving government 
assistance through the Troubled Asset Relief Program (TARP). 
Congress further directed the Panel to examine the farm loan 
restructuring programs in place at the U.S. Department of 
Agriculture's (USDA) Farm Service Agency (FSA) and the 
government-chartered Farm Credit System (FCS)--as well as 
Treasury's TARP-funded Making Home Affordable Program for 
residential mortgages--in an effort to determine the 
suitability of each as a model for a possible farm loan 
restructuring program to be carried out by TARP-recipient 
banks.
    In considering these issues, two key questions arose:
     Considering the state of agriculture markets 
generally and farm credit conditions in particular, does a need 
presently exist for a program designed to restructure 
delinquent farm loans?
     If a need exists, is a TARP-based restructuring 
model or some other model likely to be the most effective in 
easing any stresses in the farm credit markets?
    Thus far, the farm sector has fared somewhat better than 
the broader economy throughout the financial crisis. Buoyed by 
continued strength in farmland values, generally high commodity 
prices, record levels of farm income and farm operator 
household income, and historically low debt-to-asset ratios, 
the agriculture sector--on the whole--has entered the crisis on 
the heels of several notably robust years. Trends in farm loan 
delinquencies mirrored the positive conditions in the sector, 
and data on farm loans made by FSA, FCS, and commercial banks 
all reveal historically low levels of troubled farm loans in 
the months and years leading up to the crisis. Further, the 
relative lack of exotic financial products in the farm credit 
market has insulated the sector from some of the major 
challenges seen in residential mortgages.
    Nonetheless, opposing trends within the agriculture sector 
ensured that the benefits over the past few years were not 
shared evenly. Last year's record high commodity crop prices 
led crop farmers to reap substantial rewards, but they also led 
to soaring input costs for livestock farmers and the dairy 
industry. These high costs caused the livestock and dairy 
sectors to operate in the red months before the cataclysmic 
financial shocks of last fall. Similarly, as the economic 
downturn has begun to take its toll on rural America, pain has 
been concentrated in some sectors more than others. In 
particular, significant stress persists in the livestock and 
dairy sectors.
    The overall impact of the financial crisis on agriculture 
cannot be assessed with certainty. To date, while measures of 
the strength of the farm sector have fallen from the positive 
levels of the preceding years, they remain within historic 
averages. USDA projects that net farm income will decline by 20 
percent in 2009, while remaining above a running ten-year 
average. The average U.S. farm operator household income is 
also projected to decline, although by considerably less than 
net farm income--a result of the rising importance of non-farm 
sources of income for American farmers. While USDA projections 
show net farm income recovering in 2010 and returning to record 
levels by the end of the projection period, the current crisis 
has defied the projections of all but the most pessimistic of 
forecasters. With such a weak forecasting capacity, the effect 
that continued economic troubles could have on agriculture 
simply cannot be known.
    It is also significant that the economic crisis is truly 
global in scale. Agricultural exports have been a significant 
source of income for farmers over the past decade, and the 
long-term success of American agriculture depends in no small 
part on the sector's ability to market its products to a 
growing middle class overseas. As economic conditions 
deteriorate around the globe, the market for American farm 
products will shrink.
    The ability to determine whether downward trends in 
agriculture markets generally may result in a need for a farm 
loan restructuring program is constrained by a lack of 
definitive data on trends in farm loan restructurings and farm 
foreclosures. While a review of available data on farm loan 
delinquencies, credit availability, and demand for loans from 
FSA--the lender of last resort--reveals some troubling trends, 
without definitive data, it is difficult to draw definitive 
conclusions or to make definitive recommendations at this time.
    As the Panel noted in its March report on residential 
mortgage foreclosure mitigation, in order for Congress and 
regulators to respond properly and promptly to issues in the 
market, better information is essential. Congress should create 
a farm loan performance reporting requirement to provide a 
source of comprehensive intelligence about loan performance, 
loss mitigation efforts, and foreclosure. Banking regulators, 
USDA, and FCS could be required to analyze these data and to 
make the data and their analysis public. To the extent that 
lenders already report delinquency and foreclosure data to 
credit reporting bureaus, the additional cost of federal 
reporting would be quite modest, but the better information 
could be very valuable both in identifying problems and in 
working out policy responses.
    Should the current negative economic trends in agriculture 
level out or even reverse, as USDA projects, Congress could 
determine that no action to mitigate farm loan foreclosures is 
necessary. Conversely, should conditions continue to 
deteriorate, falling below historical averages and causing 
significant stress for farmers trying to repay their debt, 
Congress has a range of possible responses:
    One possibility, and the topic of this report, is a farm 
loan restructuring mandate for TARP recipient banks. Congress 
could impose a restructuring mandate on TARP banks, following 
the pattern of the obligations imposed on lenders by FSA, FCS, 
or Treasury's Making Home Affordable program. Each model offers 
one possible means to require restructuring, but all would 
require some amount of adaptation to fit the TARP-recipient 
banks' loan model, and none can be considered ideal. 
Specifically, transferring the restructuring programs of either 
FSA or FCS--both specialized institutions designed to extend 
credit to farmers and rural America--would require revision to 
be implemented at commercial banks with diverse loan 
portfolios. For its part, the formulaic structure of the Making 
Home Affordable Program would impede its easy transfer to the 
idiosyncratic farm credit market.
    While it is an option, mandatory modifications through the 
TARP might not be the most effective policy choice because of 
the limited number of farm loans held by TARP-recipient banks. 
Commercial banks hold only about 45 percent of overall farm 
debt--with the FCS, FSA, and other farm lenders collectively 
extending the majority of farm credit. When considering real 
estate debt, commercial banks hold an even smaller piece, only 
38 percent. Further, TARP-recipient banks hold only 27 percent 
of the portion of farm real estate loans made by commercial 
banks, or only about ten percent of total farm real estate 
debt. Thus, a restructuring mandate for TARP-recipient banks 
would have very limited reach. Moreover, the role of TARP banks 
in the farm credit arena can be expected to diminish over time 
as such banks return their TARP funding.
    Congress and Treasury have other options within the TARP to 
protect farm homes. In the same way that Congress has embraced 
the principle of using the TARP to protect non-farm homes, it 
could apply this principle in different ways. One possibility 
would be to devote some portion of the remaining TARP funding 
to a farm mortgage foreclosure mitigation program, patterned on 
the incentive-based program developed to protect homes, but 
focusing on bank participation that extends beyond current TARP 
recipients. Unlike residential mortgage restructurings, farm 
loan restructurings must also consider business plans, cash 
flows, and market factors. Therefore, the model would need to 
be adapted to provide the necessary flexibility. Another option 
for utilizing TARP money is to create a loan guarantee program 
for restructured farm loans.
    Finally, if the farm sector continues to decline, Congress 
has options outside the TARP program. As noted above, the U.S. 
government has a longstanding commitment to farmers. This is 
embodied through the numerous existing programs designed to 
assist the farm industry, many of which are targeted toward 
different needs or sectors. If Congress determines that the 
farm sector in part or in whole needs assistance, then such 
assistance could be delivered through existing programs. While 
having a potentially wider impact than a TARP bank mandate, 
this alternative could also allow assistance to be narrowly 
targeted, such as to the struggling dairy and livestock 
sectors.
         SECTION ONE: SPECIAL REPORT ON FARM LOAN RESTRUCTURING


                            A. Introduction


     1. PAST FARM FORECLOSURE PROBLEMS AND FRAMING THE ISSUE TODAY

    The global financial crisis has led more than a few 
observers to draw parallels between today's economic woes and 
those of the Great Depression. While most of those comparisons 
have focused on weaknesses in the housing sector and a number 
of regulatory challenges, they have generally ignored 
discussions of the impact on agriculture. The American economic 
landscape has changed dramatically since the 1930s, but much of 
its identity remains rooted in the farming communities that 
sweep across the Great Plains from one coast to the other. In 
many of these communities, memories of devastating farm 
foreclosures from the Great Depression, and later, the farm 
crisis of the 1980s, remain fresh in the minds of those who 
rely on the land to make their living. Vulnerability to both 
severe weather and severe price swings in commodities keep 
farmers perpetually on guard against the next great crisis.
    Thus far, the agriculture sector has fared somewhat better 
than the economy in general throughout the financial crisis. 
The balance sheets of farmers and agricultural lenders have 
remained relatively strong and credit is still available at 
reasonable prices. Rural areas were generally less exposed to 
the housing bubble, providing some protection for rural 
community banks from the shock of the financial crisis. 
Agricultural lenders also tend to cultivate close relationships 
with farmers, holding their loans to maturity rather than 
selling them in the secondary markets. Direct loans and 
guarantees from FSA and the farmer-friendly policies of the 
government-chartered FCS also help to bring stability to 
agricultural credit markets. Interest rates for farm credit 
remain at historically low rates.
    Nonetheless, the agriculture sector has not remained immune 
to the crisis. Agricultural banks \1\ have generally 
outperformed other commercial banks as the crisis has deepened, 
but profits have declined. The average rate of return on assets 
for agricultural banks dropped from 1.1 percent in 2007 to 1.0 
percent in 2008, while the average rate of return on assets for 
other small banks dropped from 0.9 percent to 0.2 percent over 
the same period.\2\ This trend continued into the first quarter 
of 2009. Farm commodity prices have fallen since last summer 
with the rest of the market, reducing expectations for farm 
income in 2009. USDA expects net farm income to decline 20 
percent in 2009, reducing some farmers' ability to repay loans 
later in the year, though the impact of this reduction in net 
farm income is expected to be dampened by the significant role 
that off-farm income plays in farm operator household finances. 
Default rates have been historically low in recent years for 
all farm lenders, but they appear to have bottomed out and have 
begun to rise since the middle of 2008. The FCS nonperforming 
loan rate is at a level not seen since the mid-1990s, when the 
system had finally recovered from the farm crisis of the 
1980s.\3\ Demand for direct operating loans from FSA, the 
lender of last resort, has increased 81 percent over the last 
year, and demand for direct ownership loans has increased by 
132 percent. There are also signs that agricultural lenders 
have tightened credit standards in 2009 by virtue of more 
documentation requirements and oversight of loans, and possibly 
making or having less credit available to producers.
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    \1\ The Federal Reserve defines agricultural banks as commercial 
banks that have a proportion of farm loans (real-estate and non-real-
estate) to total loans that is greater than the unweighted average of 
this proportion at all banks. The first quarter 2009 unweighted average 
was 14.01 percent. Board of Governors of the Federal Reserve System, 
Federal Reserve Bank E-15 Release: About the Release (accessed July 6, 
2009) (online at www.federalreserve.gov/releases/e15/about.htm). The 
American Bankers Association uses a slightly different definition. It 
defines ``farm banks'' as banks with assets less than $1 billion whose 
proportion of domestic farm loans to total domestic loans is greater 
than or equal to the unweighted average of this proportion at all 
banks. The 2008 average was 14.20 percent. American Bankers 
Association, 2008 Farm Bank Performance, at 1 (May 2009) (online at 
www.aba.com/NR/rdonlyres/05858407-284E-46CD-9443-38EB9601A25A/60074/
AGBankPerformance2009.pdf) (hereinafter ``ABA 2008 Farm Bank 
Performance'').
    \2\ Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release E.15: Agricultural Finance Databook: Second 
Quarter 2009, at 27 (July 2, 2009) (B.7 Selected Measures of Financial 
Performance of Agriculture and Other Small Banks) (online at 
www.federalreserve.gov/releases/e15/current/pdf/databook.pdf) 
(hereinafter ``Second Quarter Fed Databook'').
    \3\ Federal Farm Credit Banks Funding Corporation, The Farm Credit 
System, at 6 (June 2009) (online at www.farmcredit-ffcb.com/farmcredit/
serve/public/invest/present/ report.pdf?assetId=134793).
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                2. CONGRESSIONAL OVERSIGHT PANEL MANDATE

    Amid increasing concerns that the financial crisis and the 
global recession may soon lead to increasing loan defaults in 
the agriculture sector, Congress included a provision in the 
Helping Families Save Their Homes Act of 2009 (P.L. 111-22), 
signed into law on May 20, 2009, requiring the Panel to issue a 
special report on farm loan restructuring that: \4\
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    \4\ Helping Families Save Their Homes Act of 2009, Pub. L. No. 111-
22.
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    a. analyzes the state of the commercial farm credit markets 
and the use of loan restructuring as an alternative to 
foreclosure by recipients of financial assistance under the 
Troubled Asset Relief Program; and
    b. includes an examination of and recommendation on the 
different methods for farm loan restructuring that could be 
used as part of a foreclosure mitigation program for farm loans 
made by recipients of financial assistance under the Troubled 
Asset Relief Program, including any programs for direct loan 
restructuring or modification carried out by the Farm Service 
Agency of the Department of Agriculture, the farm credit 
system, and the Making Home Affordable Program of the 
Department of the Treasury.
    As one of the central pillars of the Treasury's Financial 
Stability Plan, a residential mortgage foreclosure mitigation 
program, the Home Affordable Modification Program, was 
announced in March of this year. The goal of this program is to 
stem the rising tide of mortgage defaults, creating more 
beneficial outcomes for lenders, borrowers, and the economy in 
general. The program provides incentives for all mortgage 
lenders to offer a standardized modification process to 
troubled borrowers. Banks that receive new capital infusions 
through the TARP after the date of enactment of the program are 
required to offer the modification program as part of the terms 
of their capital assistance agreement. The Panel's reporting 
requirement asks it to contemplate whether a similar 
modification program would be advisable in the case of troubled 
agricultural loans held by recipients of financial assistance 
from TARP. This requires the Panel to explore the state of the 
nation's agriculture economy, general credit availability for 
agriculture, and the alternatives available when farmers hit 
hard times.

                    B. Agriculture Markets Generally

    Despite the crisis conditions in financial markets and the 
U.S. economy in the closing months of 2008, USDA concluded in 
December that the American farm sector was in a ``relatively 
strong financial position'' entering 2009.\5\ While 
repercussions emanating from the global financial crisis have 
certainly not left farmers and the agriculture sector entirely 
unscathed, the farm sector entered the crisis in an 
historically strong financial position, providing farmers--on 
the whole--with a significant capital buffer to weather a 
downturn in commodity prices and a modest tightening of farm 
credit. In March, USDA projected that ``declines [in exports, 
prices, and farm income], though substantial, will bring 
agriculture back to trend outcomes,'' and that the effects of 
the crisis would be ``less severe'' for agriculture than for 
many other sectors of the economy.\6\
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    \5\ U.S. Department of Agriculture, Economic Research Service, 
Agricultural Income and Finance Outlook, at 1 (Dec. 2008) (AIS-86) 
(online at usda.mannlib.cornell.edu/usda/current/AIS/AIS-12-10-
2008.pdf) (hereinafter ``USDA Finance Outlook'').
    \6\ U.S. Department of Agriculture, Economic Research Service, The 
2008/2009 World Economic Crisis: What It Means for U.S. Agriculture, at 
2 (Mar. 2009) (WRS-09-02) (online at www.ers.usda.gov/Publications/
WRS0902/WRS0902.pdf) (hereinafter ``USDA Crisis Impact Report'').
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    Nonetheless, the agriculture sector is characterized by its 
volatility and cyclical nature, and, not infrequently 
throughout history, farmers have watched good times give way to 
times of great hardship. Further, inherently opposing trends 
within the agriculture sector ensure that, even during strong 
times, there are those who see their financial position 
weakened. For example, soaring commodity prices may lead to 
large profits for commodity farmers, but they also lead to high 
input costs for the livestock sector. Last, while USDA 
projections paint a reasonably positive picture for the 
agriculture sector compared with the economy on the whole, the 
current global economic crisis has been deeper, more 
widespread, and more enduring than all but the most pessimistic 
of forecasters could have projected. Consequently, it remains 
to be seen whether the added strain in the agriculture sector 
in recent months is indeed bringing agriculture back to trend 
outcomes, as USDA projects, or whether these negative trends 
are harbingers of more serious troubles to come as global 
economic challenges persist.
    In order to provide context for this report's analysis of 
farm credit markets and farm loan restructuring, this section 
discusses agriculture markets generally, examining current 
markets, historical trends, and notable differences between 
certain sectors of agriculture.

                               1. PROFITS

    Profits in the agriculture sector reached record high 
levels in recent years, whether measured in terms of net farm 
income or net cash income, as large increases in the value of 
crop production (crop receipts increased by 20 percent or more 
in each of the past two years) were only partially offset by 
rising costs of production.\7\ Net farm income, which is 
defined as ``the portion of the net value added by agriculture 
to the national economy earned by farm operators,'' is 
preliminarily estimated to have hit $89.3 billion in 2008, the 
highest level on record and 47.6 percent above net farm income 
five years earlier, in 2003.\8\ Net cash income, ``the cash 
earnings realized within a calendar year from the sales of farm 
production and the conversion of assets, both inventories and 
capital consumption, into cash,'' is estimated at $93.4 billion 
in 2008, also the highest level on record and 30.6 percent 
above net cash income realized in 2003.\9\ While both measures 
are worth noting, net cash income is generally considered a 
better measure of solvency, because it tracks the amount of 
cash available to farmers for living expenses and to pay down 
debt.\10\
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    \7\ U.S. Department of Agriculture, Economic Research Service, Farm 
Income and Costs: 2009 Farm Sector Income Forecast (Feb. 12, 2009) 
(online at www.ers.usda.gov/Briefing/FarmIncome/nationalestimates.htm).
    \8\ U.S. Department of Agriculture, Economic Research Service, Farm 
Income: Data Files: Historical Data (online at www.ers.usda.gov/
Briefing/FarmIncome/Data/Constant-dollar-table.XLS) (accessed July 7, 
2009) (hereinafter ``USDA Historical Farm Income Data''); U.S. 
Department of Agriculture, Economic Research Service, Farm Income and 
Costs: Glossary (online at www.ers.usda.gov/BRIEFING/FARMINCOME/
Glossary/def_nfi.htm) (accessed July 7, 2009) (hereinafter ``USDA Farm 
Income Glossary'').
    \9\ USDA Historical Farm Income Data, supra note 8.
    \10\ USDA Farm Income Glossary, supra note 8.
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    According to USDA, both net farm income and net cash income 
are forecasted to decline in 2009 from these record levels, as 
livestock and commodity prices drop off more precipitously than 
costs of production, while remaining above the ten-year 
averages for the indicators. Specifically, net farm income is 
projected to fall by 20 percent, to $71.2 billion, and net cash 
income is projected to drop by 17 percent, to $77.3 
billion.\11\ These projected values for 2009 are still 9 
percent and 7.6 percent above the rolling ten-year averages for 
net farm income ($65.3 billion) and net cash income ($71.8 
billion), respectively. However, USDA also cautions that high 
dollar exchange rates coupled with a deeper than expected 
global economic downturn could lead net farm income to drop 
further, perhaps by as much as 33 percent from its 2008 
level.\12\ Nonetheless, the deleterious effect that this 
decline in net farm income could have on family farmers across 
America is expected to be mitigated somewhat by off-farm 
sources of income; indeed, as discussed later in this section, 
the decline in average farm operator household income--
factoring in all sources of income for farm families--is 
expected to be distinctly less severe (USDA projected in 
February that average farm operator household income would 
decline by roughly 2 percent in 2009, though it should be noted 
that the sustained economic downturn could lead to a steeper 
than expected drop off).\13\
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    \11\ USDA Historical Farm Income Data, supra note 8.
    \12\ USDA Crisis Impact Report, supra note 6, at 2.
    \13\ U.S. Department of Agriculture, Economic Research Service, 
Farm Household Economics and Well-Being: Historic Data on Farm Operator 
Household Income (online at www.ers.usda.gov/Briefing/WellBeing/
Gallery/historic.htm) (accessed July 8, 2009) (hereinafter ``Farm 
Household Income Data'').
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         Figure 1: Net Farm Income: 1998-2009 (projected) \14\

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    \14\ 1AUSDA Historical Farm Income, supra note 8. 

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
         Figure 2: Net Cash Income: 1998-2009 (projected) \15\

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    \15\ 1AUSDA Historical Farm Income, supra note 8.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Nonetheless, USDA's long-term projections for net farm 
income and net cash income show both indicators ticking back 
upward in 2010 and steadily increasing over the course of the 
next decade as a result of food demand growth in developing 
countries (due to rising populations, urbanization, and diet 
diversification), as well as of a growing global demand for 
biofuels.\16\ However, USDA also notes that ``the main 
uncertainty for the long run concerns the value of the U.S. 
dollar compared with the currencies of other trading 
countries'' (particularly the Chinese yuan), and it cautions 
that its projections for net farm income several years in the 
future depend heavily on the relative strength of the 
dollar.\17\ Under a ``strong dollar'' scenario, USDA estimates 
that net farm income could decline by roughly 7 percent from 
2008 to 2013 (though this estimate still projects that income 
would rise from 2009 lows through 2013), but, under a ``weak 
dollar'' scenario, USDA projects that net farm income could 
soar to $106 billion by 2013--a 19 percent increase over the 
record 2008 level.\18\
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    \16\ U.S. Department of Agriculture, USDA Agricultural Projections 
to 2018, at 60 (Feb. 2009) (Table 27: Farm Receipts, Expenses, and 
Income) (online at http://www.ers.usda.gov/Publications/OCE091/
OCE091.pdf) (hereinafter ``USDA Long-term Projections'').
    \17\ USDA Crisis Impact Report, supra note 6, at 3.
    \18\ USDA Crisis Impact Report, supra note 6, at 3.
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                             2. LAND VALUES

    The value of farmland likewise reached a record high level 
in 2008 of $2,170 per acre, as the average value per acre of 
farmland in the United States increased by 7.96 percent over 
2007.\19\ This marked the twenty-first consecutive year in 
which the price of farmland rose higher, with the last decrease 
occurring from 1986 to 1987, at the height of the 1980s farm 
crisis.\20\ The USDA attributes this steady increase in 
farmland values to consistent growth in farm income, heightened 
non-farm demand for farmland, favorable interest rates, and 
generally rising (though volatile) commodity prices.\21\
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    \19\ U.S. Department of Agriculture, Economic Research Service, 
Farm Income: Data Files: Number of Farms, Land in Farms, and Value of 
Farm Real Estate, 1850-2008 (online at www.ers.usda.gov/Data/
FarmIncome/FinfidmuXls.htm) (accessed July 7, 2009) (hereinafter ``USDA 
Farm Real Estate Data'').
    \20\ Id.
    \21\ U.S. Department of Agriculture, Economic Research Service, 
Farm Income and Costs: Assets, Debt, and Wealth (online at 
www.ers.usda.gov/Briefing/FarmIncome/Wealth.htm) (accessed July 7, 
2009) (hereinafter ``USDA Farm Income and Costs'').
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      Figure 3: Average Value per Acre of Farmland: 1987-2008 \22\

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    \22\ USDA Farm Real Estate Data, supra note 19. 

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    

    Generally, the percent increases in farmland value did not 
match the percent increases in housing prices during the real 
estate bubble in recent years (the percent increase from year-
to-year in housing prices surpassed the percent increase in 
farmland value each year from 1998 to 2004). However, farmland 
values did increase by double digits year-over-year twice in 
the earlier part of this decade, jumping 20.1 percent from 2004 
to 2005 and 13.7 percent from 2005 to 2006, with the percent 
increase in farmland values exceeding the percent increase in 
housing prices from year-to-year on both occasions.\23\ 
Farmland values continued to increase in 2007 and 2008, while 
housing prices dropped precipitously. Nonetheless, USDA 
projects that farm real estate values will fall by 2 percent in 
2009, and, although USDA notes that ``farm real estate values 
are not very sensitive to short-term changes in the returns to 
agriculture,'' it will be critical to track this indicator in 
the months and years ahead as a gauge of the health of the farm 
sector.\24\
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    \23\ USDA Farm Real Estate Data, supra note 19.
    \24\ USDA Crisis Impact Report, supra note 6, at 24.
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  Figure 4: Changes in Farmland Value vs. Changes in Housing Prices: 
                             1998-2008 \25\

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    \25\ USDA Farm Real Estate Data, supra note 19; Standard & Poor's, 
S&P/Case-Shiller Home Price Indices (Instrument: Seasonally Adjusted 
U.S. National Values) (online at www2.standardandpoors.com/spf/pdf/
index/SA_csnational_values_022445.xls) (accessed July 15, 2009). Yearly 
value is taken as the average of the index value for the four quarters 
of each year. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Data from quarterly, district-based Federal Reserve surveys 
of banks on farm credit conditions and farmland values confirm 
the continued strength of farmland values in 2008, while 
showing some modest weakening in values in the fourth quarter, 
as the crisis in the financial sector reverberated throughout 
the broader economy.\26\ For example, the Kansas City District 
survey realized the highest ever year-over-year increase in the 
market value of good farmland, from the third quarter of 2007 
to the third quarter of 2008 (21.2 percent for dry land and 
23.4 percent for irrigated land).\27\ However, by the fourth 
quarter of last year, the survey found that the year-over-year 
increase in value had dropped to 7.1 percent for dry land and 
10.9 percent for irrigated land, with the value of both dry and 
irrigated land dropping by approximately one percent from the 
third to the fourth quarter of 2008.\28\
---------------------------------------------------------------------------
    \26\ Five Federal Reserve District Banks conduct quarterly surveys 
of commercial banks to gather information on agricultural land values 
and credit conditions in their Districts: Chicago, Kansas City, 
Minneapolis, San Francisco, and Richmond. The survey methodology and 
exact questions differ from District to District; however, answers to 
generally similar questions across Districts are compiled as part of 
the Board of Governors of the Federal Reserve System's Statistical 
Release E.15, the Agricultural Finance Databook. This Databook, 
released quarterly, includes this survey information, along with other 
information on agricultural credit conditions compiled from Federal 
Reserve and FDIC sources. The databook is the most comprehensive source 
of data on farm credit. See Second Quarter Fed Databook, supra note 2.
    \27\ Jason Henderson and Maria Akers, Federal Reserve Bank of 
Kansas City, Recession Catches Rural America, Federal Reserve Bank of 
Kansas City Economic Review, at 71 (First Quarter 2009), (online at 
www.kc.frb.org/PUBLICAT/ECONREV/PDF/09q1Henderson.pdf) (hereinafter 
``Henderson Article''); Federal Reserve Bank of Kansas City, Survey of 
Agricultural Credit Conditions (First Quarter 2009) (online at 
www.kansascityfed.org/Agcrsurv/AGCR1Q09.pdf) (hereinafter ``KC Fed 
First Quarter Survey'').
    \28\ Federal Reserve Bank of Kansas City, Survey of Agricultural 
Credit Conditions: Historical Data (online at www.kansascityfed.org/
home/subwebnav.cfm?level=3&theID=9754&SubWeb=10658) (accessed July 7, 
2009) (hereinafter ``KC Fed Survey Historical Data'').
---------------------------------------------------------------------------
    Surveys in other Federal Reserve Districts, including 
Chicago, Minneapolis, San Francisco, and Richmond, noted 
similar trends, with the reported value of farmland increasing 
progressively more modestly over the previous year as 2008 wore 
on in most regions and with the value of good farmland 
decreasing from 2007 to 2008 in the Richmond region.\29\ 
Further, in the fourth quarter 2008 surveys, banks surveyed in 
the Chicago and Richmond regions expressed pessimism about 
trends in farmland values in 2009, with 35 percent of those 
surveyed in the Chicago region predicting that farmland values 
would decline in the first quarter of 2009 and 25 percent of 
those surveyed in the Richmond region predicting such a decline 
(only 4 percent and 6 percent of respondents in the Chicago and 
Richmond regions, respectively, anticipated increases in the 
first three months of 2009).\30\
---------------------------------------------------------------------------
    \29\ Second Quarter Fed Databook, supra note 2, at 39 (C.6 Trends 
in Farm Real Estate Value and Loan Volumes).
    \30\ Second Quarter Fed Databook, supra note 2, at 39 (C.6 Trends 
in Farm Real Estate Value and Loan Volumes).
---------------------------------------------------------------------------
    Thus far, fears that farmland prices could decline 
precipitously--perhaps paralleling the ``bust'' in the 
residential housing market--have been unfounded.\31\ On the 
contrary, first quarter 2009 Federal Reserve surveys have found 
continued modest appreciation in farmland values on a year-
over-year basis--2.9 percent and 3.8 percent over first quarter 
2008 for dry and irrigated farmland in the Kansas City region 
and two percent over first quarter 2008 for good farmland in 
the Chicago region.\32\ However, slowed year-over-year 
appreciation and some quarterly decreases in farmland values 
(the value of good farmland in the Chicago region decreased by 
six percent from the fourth quarter of 2008 to the first 
quarter of 2009) confirm USDA's projection that a modest 
decline in farmland values--or at least an end to steady 
appreciation--is likely to occur in the coming months.\33\ 
Should these downward trends be more severe or more prolonged 
than anticipated, farmers could watch much of the equity they 
have built up in their land evaporate, straining their capacity 
to repay or restructure loans collateralized by their farm real 
estate. As noted above, this indicator should be monitored 
closely.
---------------------------------------------------------------------------
    \31\ For a discussion of a possible farmland bubble, see U.S. 
Senate Committee on Banking, Housing, and Urban Affairs, Testimony of 
Iowa Superintendent of Banking Thomas B. Gronstal, The Condition of the 
Banking Industry, 110th Cong., at 6 (Mar. 4, 2008) (online at 
banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStore_id=f90776b5-ab3a-45d9-b9a2-
231d9697dbcc) (``The dramatic increase of farmland value in the last 
few years makes the agriculture sector look strong . . . If there has 
been too much leveraged or loaned against the inflated value of farm 
land, the bubble will burst and we will once again experience an 
economic crisis similar to that of the 1980s'').
    \32\ Second Quarter Fed Databook, supra note 2, at 39 (C.6 Trends 
in Farm Real Estate Value and Loan Volumes).
    \33\ Second Quarter Fed Databook, supra note 2, at 39 (C.6 Trends 
in Farm Real Estate Value and Loan Volumes).
---------------------------------------------------------------------------

                         3. DEBT-TO-ASSET RATIO

    USDA estimates that both total farm debt and total farm 
assets will reach record high levels in 2009, with total farm 
debt hitting $217 billion and total farm assets reaching $2.39 
trillion.\34\ The resulting debt-to-asset ratio--a key measure 
of farmers' financial leverage--is expected to drop to 9.1 
percent, down from 9.2 percent in 2008, and considerably down 
from its peak of 22.2 percent, reached in 1985.\35\ The 
increase in farm assets has outpaced the increase in farm debt 
for ten consecutive years.\36\ Indeed, USDA reports that 
American farmers have adopted an increasingly conservative 
approach to financing their operations in the years since the 
1980s farm crisis, often paying cash for land, equipment, and 
inputs, with 70 percent of farmers carrying no outstanding debt 
from year to year.\37\ According to USDA's 2007 Agricultural 
Resource Management Survey, the most recent such survey 
available, 63 percent of farmers reported no use of debt even 
to finance production within calendar year 2007.\38\
---------------------------------------------------------------------------
    \34\ USDA Historical Farm Income Data, supra note 8.
    \35\ USDA Historical Farm Income Data, supra note 8.
    \36\ USDA Historical Farm Income Data, supra note 8.
    \37\ USDA Finance Outlook, supra note 5, at 45.
    \38\ USDA Finance Outlook, supra note 5, at 55.
---------------------------------------------------------------------------
    While the agriculture sector is now generally characterized 
by low debt-to-asset ratios when compared to other sectors of 
the economy, with farmers often building up considerable equity 
in their farms and acquiring many physical assets that can 
serve as collateral for loans, there are signs that farmers 
have been taking on more debt and carrying over more debt in 
recent months than in the preceding period.\39\ FSA \40\ 
reports that, as of May 30, 2009, demand for its direct 
ownership loans was up 132 percent and demand for its direct 
operating loans was up 81 percent, with 45 percent of direct 
operating loans approved in FY 2009 going to customers who did 
not have existing FSA operating loans.\41\ Further, Federal 
Reserve Bank surveys of agriculture lenders note an increase in 
those carrying over operating debt from year-to-year, with 
between 18 and 25 percent of bankers surveyed reporting higher 
rates of renewals and extensions of farm operating loans in the 
first quarter of 2009 when compared with the first quarter of 
2008.\42\ As discussed later in this section, fluctuations in 
input prices paid and market prices received by farmers in 
recent months, and the shrinking farm profit margins that have 
resulted, may contribute to an increased demand for credit to 
sustain farmers through the current downturn.
---------------------------------------------------------------------------
    \39\ USDA Finance Outlook, supra note 5, at 49-50; Paul Ellinger 
and Bruce Sherrick, Financial Markets in Agriculture, Illinois Farm 
Economics Update, Department of Agricultural and Consumer Economics, 
University of Illinois at Urbana-Champaign, at 2 (Oct. 15, 2008) 
(online at www.farmdoc.uiuc.edu/IFEU/IFEU_08_02/IFEU_08_02.pdf) 
(hereinafter ``Ellinger and Sherrick October Article'').
    \40\ The Farm Service Agency and its loan programs are discussed in 
detail infra, Section One Part (C)(2)(b).
    \41\ U.S. House Committee on Agriculture Subcommittee on 
Conservation, Credit, Energy, and Research, Testimony of Administrator 
of the Farm Service Agency Doug Caruso, To Review Credit Conditions in 
Rural America, 111th Cong. (June 11, 2009) (online at 
agriculture.house.gov/testimony/111/h061109sc/Caruso.doc) (hereinafter 
``FSA June Testimony'').
    \42\ Id.
---------------------------------------------------------------------------

     Figure 5: Farm Debt-to-Asset Ratio: 1970-2009 (projected) \43\

---------------------------------------------------------------------------
    \43\ Id. 

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
                             4. FOOD DEMAND

    Global demand for U.S. agricultural products increased 
dramatically in the years preceding the onset of the economic 
crisis last fall, contributing to the positive trends in farm 
income, farmland value, and the farm debt-to-asset ratio 
highlighted above. In particular, USDA cites strong global 
economic growth beginning in the mid-to-late 1990s, population 
growth, an increased demand for meat and dairy products 
(particularly in developing countries), and a rapid rise in 
demand for biofuels as key factors underlying the long-term 
upward trajectory of food demand, and, consequently, food 
prices.\44\ Indeed, the annual value of U.S. agricultural 
exports increased by 117 percent from 2002 to 2008, reaching an 
all-time high of $115.4 billion last year.\45\ The declining 
value of the U.S. dollar beginning in the early years of this 
decade is also considered a major contributor to the increase 
in global demand for U.S. agricultural products.\46\
---------------------------------------------------------------------------
    \44\ U.S. Department of Agriculture, Economic Research Service, 
Global Agricultural Supply and Demand: Factors Contributing to the 
Recent Increase in Commodity Prices, at 6 (Revised July 2008) (WRS-
0801) (online at www.ers.usda.gov/Publications/WRS0801/WRS0801.pdf) 
(hereinafter ``USDA Supply and Demand Article'').
    \45\ U.S. Department of Agriculture, Economic Research Service, 
Foreign Agricultural Trade of the United States: Data Sets: Total Value 
of U.S. Agricultural Trade a Trade Balance, Monthly (online at 
www.ers.usda.gov/Data/FATUS/DATA/moUStrade.xls) (accessed July 8, 2009) 
(hereinafter ``USDA Agricultural Exports Data'').
    \46\ USDA Supply and Demand Article, supra note 44, at 6.
---------------------------------------------------------------------------

Figure 6: Value of U.S. Agricultural Exports by Month: 1995-April 2009 
                                  \47\

---------------------------------------------------------------------------
    \47\ USDA Agricultural Exports Data, supra note 45. 

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    While food demand and food exports experienced significant 
increases in recent years, reduced consumer spending 
domestically and around the world as a result of the economic 
crisis is expected to lead to reduced demand for food products 
in 2009. In particular, USDA has found that American consumers 
have reduced consumption of food at home and away from home 
over the course of the past year (with more rapid decreases in 
food consumption away from home), as well as that consumption 
of meat and more expensive food products has declined faster 
than food consumption on the whole.\48\ However, USDA also 
notes that ``most U.S. consumers have a sufficiently high 
standard of living that demand for food is not very sensitive 
to changes in income.'' \49\ The recession and the reduced 
price of crude oil have also cut into the demand for ethanol, 
hurting that industry.\50\ Similarly, since the fall of last 
year, as the economic downturn spread across the world and as 
the value of the U.S. dollar strengthened in comparison to 
foreign currencies, U.S. agricultural exports have dropped, 
falling from a record high of $10.6 billion in October 2008 to 
$7.6 billion in April of 2009--a decline of over 28 
percent.\51\
---------------------------------------------------------------------------
    \48\ Henderson Article, supra note 27, at 80; USDA Crisis Impact 
Report, supra note 6, at 7.
    \49\ USDA Crisis Impact Report, supra note 6, at 7.
    \50\ Henderson Article, supra note 27, at 82.
    \51\ USDA Agricultural Exports Data, supra note 45.
---------------------------------------------------------------------------
    Nonetheless, in the long-term, global food demand and, 
therefore, demand for U.S. agricultural products, is expected 
to rise, driven in large part by economic growth and population 
growth in developing countries.\52\ A report recently released 
by the Organization for Economic Cooperation and Development 
(OECD), makes a similar prediction, noting that ``once economic 
recovery begins, most of the growth in agricultural production 
and consumption will continue to come from developing 
countries,'' and adding that ``this is particularly evident for 
livestock products where the primary drivers are income and 
population growth, with a trend towards higher animal protein 
diets and continuing urbanization.'' \53\ USDA's long-term 
projections for the agriculture sector (released in February 
2009), predict that the current decline in agricultural exports 
will halt in 2010 and that exports will then increase steadily 
through 2018.\54\ However, USDA again cautions that the 
exchange rate of the dollar will be a major determining factor 
in trends in U.S. agricultural exports and, as mentioned above, 
U.S. agricultural income over the long-term, noting further 
that this rate is difficult to predict.\55\
---------------------------------------------------------------------------
    \52\ Henderson Article, supra note 27, at 84.
    \53\ Organization for Economic Cooperation and Development, OECD-
FAO Agricultural Outlook, 2009-2018, at 11 (2009) (online at 
www.oecd.org/dataoecd/2/31/43040036.pdf) (hereinafter ``OECD-FAO 
Outlook'').
    \54\ USDA Long-term Projections, supra note 16, at 61 (Table 28: 
Summary of U.S. Agricultural Trade Long-term Projections).
    \55\ USDA Crisis Impact Report, supra note 6, at 9.
---------------------------------------------------------------------------

                               5. INCOME

    While net farm income is projected to decline by 20 percent 
from its record high level in 2008, average farm operator 
household income (which takes into account both farm and non-
farm income) is projected to decline by much less--1.98 percent 
in 2009, also down from an all-time record level of $86,864 in 
2008.\56\ USDA defines the farm operator household population 
as ``everyone who shares the dwelling unit with a principal 
operator of a family farm,'' and it defines a family farm as 
``a farm where the majority of the business is owned by 
individuals related by blood, marriage, or adoption'' (in 2007, 
97.8 percent of U.S. farms were categorized as family 
farms).\57\ USDA does not collect data on the income of farm-
operator households that operate nonfamily farms.
---------------------------------------------------------------------------
    \56\ Farm Household Income Data, supra note 13.
    \57\ USDA Finance Outlook, supra note 5, at 32.
---------------------------------------------------------------------------

   Figure 7: Average U.S. Farm Operator Household Income: 1988-2009 
                            (projected) \58\

---------------------------------------------------------------------------
    \58\ Farm Household Income Data, supra note 13. 

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Comparing average U.S. farm operator household income with 
overall average U.S. household income, farm household income 
has surpassed average income for the population on the whole 
for every year since 1996.\59\
---------------------------------------------------------------------------
    \59\ Farm Household Income Data, supra note 13; USDA Finance 
Outlook, supra note 5, at 33.
---------------------------------------------------------------------------

    Figure 8: Ratio of Farm to U.S. Household Income: 1960-2007 \60\

---------------------------------------------------------------------------
    \60\ Farm Household Income Data, supra note 13. 

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Of particular note is the increasing reliance of farmers on 
non-farm sources of income. In 2009, the non-farm portion of 
farm operator household income is expected to exceed 95 percent 
for the first time in history (although USDA acknowledges that 
its definition of ``earnings of the operator household from 
farming activities'' does not completely capture the returns to 
the household provided by the farm).\61\ This trend of relying 
on off-farm income began in earnest during the 1980s farm 
crisis, and it has not abated over the past two decades. 
According to USDA, approximately 70 percent of farm operator 
households currently have either an operator or a spouse 
working at an off-farm job, and only for the households that 
operate the largest 8 percent of farms (with sales of $250,000 
or more) is average farm income greater than off-farm income on 
a yearly basis.\62\
---------------------------------------------------------------------------
    \61\ Farm Household Income Data, supra note 13.
    \62\ USDA Finance Outlook, supra note 5, at 31.
---------------------------------------------------------------------------
    While the long-term trends in average farm operator 
household income have been positive, this rising dependence on 
off-farm income also makes smaller, family farms increasingly 
vulnerable to outside economic conditions, and, in particular, 
employment conditions in rural America. The fact that an 
estimated 95 percent of farm operator household income is 
derived from non-farm sources also calls into question whether 
any analysis of trends in the agriculture sector truly captures 
financial conditions for farmers in rural America.

    Figure 9: Farm Operator Income from Non-Farm Sources: 1960-2009 
                            (projected) \63\

---------------------------------------------------------------------------
    \63\ Farm Household Income Data, supra note 13. 

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
                               6. SECTORS

    While the overall trends in agriculture have been very 
positive in recent years, there are some key differences across 
sectors of agriculture, and these differences, principally 
differences in the economic conditions and outlook for 
commodity crops versus livestock, have been exacerbated in the 
months since the onset of the economic crisis. In particular, a 
variety of issues, ranging from overproduction of cattle to 
declining dairy prices, swine flu, and the bankruptcy of 
significant companies in the industry, have combined to cause 
heightened stress across the livestock sector. Further, as 
discussed above, many trends in agriculture necessarily work at 
cross-purposes. As commodity crop prices go up, input costs for 
livestock farmers go up, and, when dairy farmers send their 
cows to slaughter because overproduction is driving prices 
down, the beef cattle sector sees increased stress in the form 
of oversupply. This section describes these notable 
differences, in an effort to highlight those sectors most at 
risk in the current economic climate.
    This analysis of the relative health of various agriculture 
sectors and of the volatility of commodity and livestock prices 
and input costs is an important precursor to this report's 
discussion of farm credit conditions. Particularly because an 
important consideration in extending credit to farmers is cash 
flow (as is discussed in detail in later report sections), 
volatile and rising costs of production coupled with declining 
prices can quickly lead farmers to become less creditworthy--
and lead banks to become more wary about extending credit to 
farmers in the affected sectors--at times when they most need 
credit to carry them through hard times.\64\ Indeed, witnesses 
at the Panel's Greeley, CO, field hearing noted that some 
reliable sources of agriculture credit have dried up, as ``the 
volatility of ag[riculture] prices and profits is becoming more 
than most lenders care to bear.'' \65\
---------------------------------------------------------------------------
    \64\ Congressional Oversight Panel, Testimony of U.S. Department of 
Agriculture Undersecretary for Farm and Foreign Agricultural Services 
Michael Scuse, COP Field Hearing in Greeley, CO on Farm Credit (July 7, 
2009) (online at cop.senate.gov/documents/testimony-070709-scuse.pdf) 
(hereinafter ``Scuse Testimony'') (``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 their credit standards, reduce 
the amount they are willing to lend to agriculture, or both.'').
    \65\ Congressional Oversight Panel, Testimony of Les Hardesty, 
Owner, Painted Prairie Farm, and Chairman, Dairy Farmers of America 
Mountain Area, COP Field Hearing in Greeley, CO on Farm Credit (July 7, 
2009) (audio online at cop.senate.gov/hearings/library/hearing-070709-
farmcredit.cfm) (hereinafter ``Hardesty Testimony'').
---------------------------------------------------------------------------

a. Commodity crops

    Commodity crop farmers--which include those farmers who 
produce mixed grains, wheat, corn, soybeans, peanuts, cotton, 
and rice--have generally seen historically strong economic 
times in recent years, and commodity crop prices have held 
comparatively steady throughout the economic downturn. 
Specifically, farm businesses (defined by USDA as those farms 
whose operator indicates that farming was his or her primary 
activity, encompassing roughly 800,000 of the nation's 2.1 
million farms) specializing in mixed grains, wheat, corn, and 
soybeans and peanuts were expected to realize double-digit 
percent increases in net cash income from 2007 to 2008 (11, 29, 
25, and 22 percent, respectively).\66\ However, cotton, rice, 
and specialty crop farmers were expected to see decreases in 
net cash income from 2007 to 2008.\67\
---------------------------------------------------------------------------
    \66\ USDA Finance Outlook, supra note 5, at 28.
    \67\ USDA Finance Outlook, supra note 5, at 31.
---------------------------------------------------------------------------
    USDA data on commodity crop prices in June 2009 demonstrate 
that, while commodity crop prices have fallen across the board 
over the course of the past year, their decline was not as 
dramatic as the drop in prices in the livestock sector 
(discussed below), and prices have begun to increase once 
again. The USDA all crops index increased by 8.0 percent from 
May to June 2009, but it remained 11 percent below its June 
2008 level.\68\ Overall, U.S. farm sector cash receipts from 
the sale of commodity crops are projected to decrease by 18.7 
percent in 2009; however, this is down from a record high level 
of $181.1 billion in 2008.\69\
---------------------------------------------------------------------------
    \68\ Price increases for commercial vegetables, fruits and nuts, 
oil-bearing crops, and potatoes and dry beans surpassed decreases in 
prices for feed grains and hay, food grains, and cotton, allowing for 
the net increase in the index from May to June. See U.S. Department of 
Agriculture, National Agricultural Statistics Service, Agricultural 
Prices, at 2 (June 29, 2009) (online at usda.mannlib.cornell.edu/usda/
current/AgriPric/AgriPric-06-29-2009.pdf) (hereinafter ``USDA June 
Agricultural Prices'').
    \69\ U.S. Department of Agriculture, Economic Research Service, 
Farm Income and Costs: Farm Sector Income Forecast (online at 
www.ers.usda.gov/briefing/farmincome/data/crXt3.htm) 
(accessed July 8, 2009) (hereinafter ``USDA Farm Sector Income 
Forecast'').
---------------------------------------------------------------------------

       Figure 10: U.S. Food and Feed Crop Prices: 1990-2009 \70\

---------------------------------------------------------------------------
    \70\ Id.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
b. Livestock

    Conversely, the livestock sector has faced considerable 
challenges in recent months, as sharply declining prices for 
meat and, in particular, dairy products have added increased 
strain on livestock farmers, whose costs of production had 
begun to exceed the breakeven point even before the economic 
crisis hit. USDA's livestock and livestock products price index 
dropped slightly from May to June 2009, falling by 0.9 percent; 
however, it is down 18 percent from June 2008.\71\ Overall, 
U.S. farm sector cash receipts from the livestock sector are 
projected to drop by 10.9 percent in 2009--a smaller percent 
decrease than the percent decrease in cash receipts for 
commodity crops, but from a lower level (livestock receipts 
only increased by 5.3 percent from 2007 to 2008 while commodity 
crop receipts increased by 34.2 percent).\72\ Further, last 
year, as commodity crops hit record high price levels, 
livestock farmers, consequently, saw dramatic increases in feed 
costs, cutting into their profit margins and, in many cases, 
causing them to operate in the red.
---------------------------------------------------------------------------
    \71\ USDA June Agricultural Prices, supra note 68, at 2.
    \72\ USDA Farm Sector Income Forecast, supra note 69.
---------------------------------------------------------------------------

Figure 11: Cattle and Hog Prices and Breakeven Prices: April 2003-April 
                               2009 \73\ 


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    i. Hogs. Net cash income for farm businesses specializing 
in hogs declined by approximately eight percent from 2007 to 
2008, and, as demonstrated in the above chart, prices received 
by hog producers fell short of the breakeven point for much of 
2008.\74\ These existing problems were worsened with the onset 
of the economic crisis and the corresponding decline in meat 
demand. Prices in the hog industry were further damaged in the 
aftermath of the H1N1 virus (swine flu) scare.\75\ Per USDA, 
which revised downward its second quarter 2009 estimate for hog 
prices, ``consumer and foreign government reactions to the flu 
likely resulted in temporarily lower domestic and foreign 
demand for pork products.'' \76\ As of May 2009, hog prices 
were nearly 18 percent below their price one year ago.\77\ 
Information recently released in the Federal Reserve's Beige 
Book for the Chicago and Kansas City Districts indicates that 
these lower hog prices, coupled with higher feed costs, will 
continue to cause stress in the hog industry in the months 
ahead. However, USDA expects that hog prices will begin to tick 
upward as demand normalizes following the H1N1 scare.\78\
---------------------------------------------------------------------------
    \73\ U.S. Department of Agriculture, Economic Research Service, 
Commodity Costs and Returns: U.S. and Regional Cost and Return Data 
(online at www.ers.usda.gov/Data/CostsAndReturns/testpick.htm) 
(accessed July 13, 2009) (hereinafter ``USDA Commodity Costs and 
Returns Data'').
    \74\ USDA Finance Outlook, supra note 5, at 28.
    \75\ Board of Governors of the Federal Reserve System, The Beige 
Book: Current Economic Conditions by Federal Reserve District, at VII-4 
(June 10, 2009) (online at www.federalreserve.gov/FOMC/BeigeBook/2009/
20090610/fullreport20090610.pdf).
    \76\ U.S. Department of Agriculture, Economic Research Service, 
Livestock, Dairy, and Poultry Outlook, at 3 (May 19, 2009) (LDP-M-179) 
(online at www.ers.usda.gov/publications/LDP/2009/05May/ldpm179.pdf) 
(hereinafter ``USDA May Livestock, Dairy, and Poultry Outlook'').
    \77\ USDA June Agricultural Prices, supra note 68, at 9.
    \78\ USDA May Livestock, Dairy, and Poultry Outlook, supra note 76, 
at 3.
---------------------------------------------------------------------------
    ii. Poultry. In comparison with other sub-categories within 
the livestock sector (hogs, cattle, and dairy), the poultry 
industry has held up fairly well. Farm businesses specializing 
in poultry saw net cash income decrease by approximately two 
percent from 2007 to 2008.\79\ As of June 2009, the overall 
poultry and eggs price index was down by 4.5 percent from June 
2008, but it increased by 3.5 percent from May to June 
2009.\80\ Specifically, prices for broilers and turkeys 
increased from April to May, by 2.0 cents and 2.2 cents per 
pound, respectively, while prices for eggs dropped by 2.6 cents 
per dozen.\81\ Broilers are up 3.0 cents from June 2008, while 
turkeys are down 7.5 cents and eggs are down 38.6 cents per 
dozen.\82\ Eggs are expected to remain a negative outlier 
throughout 2009, and prices for a dozen eggs are expected to 
decline by double digits from 2008 to 2009.\83\
---------------------------------------------------------------------------
    \79\ USDA Finance Outlook, supra note 5, at 28.
    \80\ USDA June Agricultural Prices, supra note 68, at 2.
    \81\ USDA June Agricultural Prices, supra note 68, at 2.
    \82\ USDA June Agricultural Prices, supra note 68, at 2.
    \83\ U.S. Department of Agriculture, Economic Research Service, 
Livestock, Dairy, and Poultry Outlook, at 4 (June 17, 2009) (LDP-M-180) 
(online at www.ers.usda.gov/publications/ldp/2009/06Jun/ldpm180.pdf) 
(hereinafter ``USDA June Livestock, Dairy, and Poultry Outlook'').
---------------------------------------------------------------------------
    Despite some comparatively positive indicators, the poultry 
industry has been hit by high production costs, and the 
December 2008 bankruptcy of Pilgrim's Pride, the nation's 
largest chicken producer (controlling 23 percent of the U.S. 
market), has had significant consequences for many poultry 
farmers who act as assemblers on behalf of the company.\84\ 
Pilgrim's Pride's bankruptcy also demonstrates that, even on 
the heels of good times in the agriculture sector, shrinking 
profit margins can quickly place farmers' finances in danger. 
Further, dependence on a large company such as Pilgrim's Pride 
for a steady stream of business can place farmers--and their 
ability to make good on their loans--in jeopardy through no 
fault of their own should the company fall on hard times.
---------------------------------------------------------------------------
    \84\ Henderson Article, supra note 27, at 70.
---------------------------------------------------------------------------
    iii. Cattle. The beef cattle industry saw dramatic 
increases in input costs in 2008 (fertilizer, fuel, and feed 
costs increased 64, 26, and 23 percent, respectively), leading 
to a drop in net cash income for farm businesses specializing 
in beef cattle of 27 percent from the 2007 level.\85\ Further, 
meat prices have fallen over the past year--by roughly 12 
percent from June 2008 to June 2009--and the industry has 
operated in the red for much of the past year, with the 
exception of April 2009, when meat selling prices edged above 
the breakeven price.\86\ U.S. beef exports are expected to 
decline by roughly 8 percent in 2009, though this decline is 
likely to be balanced out by an expected increase in beef 
exports of approximately 9 percent in 2010.\87\ However, per 
capita consumption of red meat in the United States is 
projected to decline over the course of the next five 
years.\88\
---------------------------------------------------------------------------
    \85\ USDA Finance Outlook, supra note 5, at 28.
    \86\ USDA June Agricultural Prices, supra note 68, at 9; U.S. 
Department of Agriculture, Economic Research Service, Production 
Indicators (June 30, 2009) (online at www.ers.usda.gov/Publications/
ldp/xlstables/productionindicators.xls).
    \87\ USDA June Livestock, Dairy, and Poultry Outlook, supra note 
83, at 7.
    \88\ USDA Long-term Projections, supra note 16, at 49 (Table 19: 
Per Capita Meat Consumption).
---------------------------------------------------------------------------
    iv. Dairy. Even within agriculture, a sector of the economy 
known for its cyclical nature, the roughly three-year cycles of 
the dairy industry stand out for their predictability, as the 
chart below demonstrates.

                 Figure 12: Milk Prices: 1990-2009 \89\

---------------------------------------------------------------------------
    \89\ Professor Brian W. Gould, Dairy Marketing and Risk Management 
Program, University of Wisconsin (online at future.aae.wisc.edu/data/
annual_values/by_area/10?tab=prices .=recent.com) (accessed July 
13, 2009). 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Nonetheless, while the current drop in dairy prices is not 
out of character considering previous such drops over the past 
two decades, the dramatic nature of the drop-off from 
historically high prices and the fact that this trough is as 
deep as any in recent memory--has made dairy without a doubt 
the hardest-hit sector of the farm economy in recent months. 
Farm businesses specializing in dairy had already seen their 
net cash income fall by 40 percent from 2007 to 2008, and the 
problems in the dairy sector have been compounded by sustained 
low milk prices.\90\ Specifically, milk prices were down 41 
percent in June 2009 compared to June 2008, and the USDA June 
2009 dairy price index was likewise 41 percent below the index 
level in June 2008.\91\ Dairy has been operating in the red 
since January 2008, with costs of production outpacing prices 
received.\92\ Average feed costs (which comprise roughly one-
half of variable operating costs for the dairy industry) 
increased by about 35 percent in 2008, and energy costs 
increased by 30 percent.\93\ These trends are particularly 
worrisome because dairy farms are among the most highly 
leveraged in the U.S. agriculture sector, and the added strain 
of the economic crisis has made the credit needs of the dairy 
industry even more acute.\94\
---------------------------------------------------------------------------
    \90\ USDA Finance Outlook, supra note 5, at 28.
    \91\ USDA June Agricultural Prices, supra note 68, at 2.
    \92\ USDA Commodity Costs and Returns Data, supra note 73.
    \93\ U.S. House Committee on Agriculture, Subcommittee on 
Livestock, Dairy, and Poultry, Testimony of Under Secretary of 
Agriculture James Miller, at 3 (July 14, 2009) (online at 
agriculture.house.gov/testimony/111/h071409/Miller.pdf) (hereinafter 
``Miller Testimony'').
    \94\ Id., at 3.
---------------------------------------------------------------------------

  Figure 13: California Milk Costs and Prices Received: January 2007-
                             March 2009\95\

---------------------------------------------------------------------------
    \95\ Monthly milk costs of production are available only on a 
state-by-state basis. California is the nation's largest milk producer. 
USDA Commodity Costs and Returns Data, supra note 73.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    However, USDA projects that prices for milk and dairy 
products will recover slightly in the latter half of 2009 and 
continue to increase in 2010, while remaining below levels from 
2007 and 2008.\96\ USDA also projects that feed costs will fall 
by approximately 15 percent in 2009, easing some of the 
pressure on dairy producers.\97\ In the near-term, though, USDA 
cautions that tighter cash margins in the dairy sector could 
lead the percentage of dairy farms with debt repayment issues 
to more than double from two years ago, going from 5 percent in 
2007 to upwards of 13 percent in 2009.\98\
---------------------------------------------------------------------------
    \96\ USDA June Livestock, Dairy, and Poultry Outlook, supra note 
83, at 1. Some project that prices may hit bottom in July 2009 and then 
slowly recover, based on the futures market. See Jim Dunn, Dairy 
Outlook, Penn State University, at 1 (June 2009) (online at 
dairyoutlook.aers.psu.edu//reports/Pub2009/DairyOutlookjun09.pdf).
    \97\ Miller Testimony, supra note 93.
    \98\ USDA Crisis Impact Report, supra note 6, at 20.
---------------------------------------------------------------------------

                         C. Farm Credit Markets


                  1. TYPES OF CREDIT NEEDED BY FARMERS

    Farming is a cyclical business, and income and expenses are 
unevenly distributed through the cycle. Farmers rely on several 
primary types of credit to help them deal with this disparity 
and finance their operations. Within a growing cycle, farmers 
face upfront costs for seed, fertilizer, and similar inputs. 
These operating expenses are generally financed through an 
annual production loan.
    However, some production expenses don't fit within the 
annual operating mold. For example, some farmers must purchase 
equipment, make real estate improvements, and purchase cattle 
or other livestock. These more significant and less frequent 
expenses are generally financed through intermediate term 
production loans. Some lenders may accept the production 
elements being purchased, such as equipment, as collateral, 
while other lenders choose to collateralize these loans with 
real estate. Intermediate production loans are often for terms 
between 14 months and seven years. Some farmers utilize a line 
of credit to finance annual or intermediate production costs.
    Finally, farmers use real estate loans to finance the land 
and buildings necessary for their business. Farm real estate 
loans are usually the largest loans and generally feature the 
longest terms, often between five and 40 years. Given that all 
farms have both real estate and production expenses, it isn't 
uncommon for farms to have multiple lines of credit.

 2. MAJOR SOURCES OF CREDIT FOR FARMERS AND TYPICAL CHARACTERISTICS OF 
                               FARM LOANS

    Total farm debt outstanding is projected to rise to an all-
time high of $217.1 billion in 2009, with approximately 52 
percent of this debt used to finance real estate and the 
remaining 48 percent used for non-real estate purposes.\99\ 
This debt is divided among several principal sources of 
agricultural credit: FSA, life insurance companies, 
individuals, FCS, and commercial banks. This section describes 
these five major sources of credit for farmers, including 
differences in market share for the various sources across real 
estate and non-real estate loans and over time. Also discussed 
is the distribution of farm loans at commercial banks, in an 
effort to highlight the role of both large and small, TARP and 
non-TARP banks in providing credit to American farmers. 
Finally, typical characteristics of farm loans made by each of 
the major farm lenders are discussed.
---------------------------------------------------------------------------
    \99\ USDA Farm Sector Income Forecast, supra note 69.
---------------------------------------------------------------------------

a. Overview of sources of credit for real estate and non-real estate 
        farm loans

    A look at the share of total farm debt held by the various 
sources of farm credit reveals that commercial banks hold more 
farm debt than any other one source of farm credit, with the 
FCS also holding a significant proportion of total farm debt. 
Comparatively, FSA held a mere two percent of farm debt in 
2007, with individuals and others and life insurance companies 
holding 10 percent and 5 percent, respectively.

   Figure 14: Market Shares of Total Farm Debt by Lender: 2007 \100\

---------------------------------------------------------------------------
    \100\ USDA Farm Sector Income Forecast, supra note 69. 

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    

    A long-term view of sources of farm credit shows that the 
share of farm debt held by commerical banks has increased over 
time, while the share of farm debt held by individuals and 
others has fallen considerably from 1960 to the present. 
Fluctuations in debt held by FSA reflect the consequences of 
the farm crisis of the 1980s, with FSA debt peaking during that 
time period.

    Figure 15: Shares of Total Farm Debt by Lender: 1960-2007 \101\

---------------------------------------------------------------------------
    \101\ U.S. Department of Agriculture, Economic Research Service, 
Farm Balance Sheet: Data Files: Farm Balance Sheet, 1960-2007 (online 
at www.ers.usda.gov/Data/FarmBalanceSheet/FBSDMU.HTM) (accessed July 
13, 2009) (hereinafter ``USDA Farm Balance Sheet Historical Data''). 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    When isolating farm real estate debt from the entirety of 
farm debt, it can be seen that the FCS holds more of this type 
of farm debt than any other lender. Life insurance companies 
hold roughly 10 percent of farm real estate debt.

Figure 16: Market Shares of Total Farm Real Estate Debt by Lender: 2007 
                                 \102\

---------------------------------------------------------------------------
    \102\ USDA Farm Sector Income Forecast, supra note 69. 

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    

    While commercial banks do not hold as much farm real estate 
debt as the FCS institutions, the share of farm real estate 
debt held by banks has increased considerably over the past two 
decades, in particular cutting into the share of farm real 
estate debt held by individuals and others. This increase in 
farm real estate debt held by commercial banks speaks to the 
ability of banks to offer competitive interest rates and a 
diverse range of services to attract and maintain customers 
(services with which many individuals, input suppliers, etc., 
could not compete).\103\ The implications of the share of farm 
debt currently held by commercial banks will be discussed in 
the sections of this report on credit availability and farm 
loan restructuring.
---------------------------------------------------------------------------
    \103\ Glenn Pederson and Tamar Khitarishvili, The Competitive 
Environment for Farm Real Estate Lending of Commercial Banks in the 
Upper Midwest, Department of Applied Economics, College of 
Agricultural, Food, and Environmental Sciences, University of 
Minnesota, at 19 (Dec. 1997) (Staff Paper P97-13) (online at 
ageconsearch.umn.edu/bitstream/13440/1/p97-13.pdf).
---------------------------------------------------------------------------

 Figure 17: Shares of Total Farm Real Estate Debt by Lender: 1960-2007 
                                 \104\

---------------------------------------------------------------------------
    \104\ USDA Farm Balance Sheet Historical Data, supra note 101. 

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    

    Conversely, commercial banks hold a majority of non-real 
estate farm debt--53 percent in 2007. The FCS holds a bit under 
a third, with individuals and others holding 13 percent and FSA 
holding 3 percent. Life insurance companies generally do not 
make loans to farmers for non-real estate purposes.

Figure 18: Market Shares of Total Farm Non-Real Estate Debt by Lender: 
                               2007 \105\

---------------------------------------------------------------------------
    \105\ USDA Farm Sector Income Forecast, supra note 69.


    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    

    An historical view of non-real estate farm lending shows 
that the predominance of commercial banks in making non-real 
estate farm loans has persisted from 1960 to the present. Debt 
held by the other sources of credit has likewise remained 
somewhat constant, save for a marked uptick in debt held by FSA 
during the 1980s farm crisis.

 Figure 19: Shares of Total Farm Non-Real Estate Debt by Lender: 1960-
                               2007 \106\

---------------------------------------------------------------------------
    \106\ USDA Farm Balance Sheet Historical Data, supra note 101. 

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
b. Farm Service Agency

    FSA, a government agency within USDA, serves as the lender-
of-last-resort for the agriculture sector, making direct loans 
to farmers and guaranteeing loans made by FCS and commercial 
banks for real estate and non-real estate purposes. FSA has its 
origins in the Great Depression of the 1930s, when farm 
failures were rampant, and it has evolved over the years to 
assist those in rural America through a variety of lending, 
training, and commodity assistance programs.
    According to the authorizing statute for FSA's lending 
programs, borrowers must ``be or become owner-operators of not 
larger than family farms,'' and borrowers are eligible for FSA 
loans only if they are ``unable to obtain sufficient credit 
elsewhere to finance their actual needs at reasonable rates and 
terms.'' \107\ The maximum loan amounts of $300,000 through 
FSA's direct loan program and $1,094,000 through FSA's 
guaranteed loan programs (FSA generally guarantees up to 90 
percent of qualifying farm loans though it can go as high as 95 
percent for loans used to refinance FSA direct loans) further 
ensure that FSA's programs tailor to family farmers and not to 
large, commercial farms.\108\ Through July 7, 2009, FSA had 
made or guaranteed 14,400 direct operating loans, 5,767 
guaranteed operating loans, 1,281 direct farm ownership loans, 
and 2,849 guaranteed farm ownership loans in fiscal year 
2009.\109\ Funding for FSA's direct and guaranteed loan 
programs is dependent on congressional appropriations. 
Oftentimes, FSA lends at a pace that would lead it to exceed 
the appropriated amount during a given fiscal year, leading to 
the inclusion of additional funding for FSA's loan programs in 
supplemental appropriations bills passed by Congress outside of 
the yearly appropriations process.
---------------------------------------------------------------------------
    \107\ Consolidated Farm and Rural Development Act, as amended by 
Pub. L. No. 109-171 (codified at 7 U.S.C. Sec. 1922(a)).
    \108\ U.S. Department of Agriculture, Farm Service Agency, Farm 
Loan Programs (online at www.fsa.usda.gov/FSA/
webapp?area=home&subject=fmlp&topic=landing) (accessed July 8, 2009).
    \109\ U.S. Department of Agriculture, Farm Service Agency, Farm 
Loan Programs: Funding (online at www.fsa.usda.gov/FSA/
webapp?area=home&subject=fmlp&topic=fun) (accessed July 8, 2009).
---------------------------------------------------------------------------
    The characteristics of loans made through FSA's direct loan 
programs vary depending on the purposes for which the loan is 
being made (short-term operating, intermediate-term operating, 
or long-term real estate), as well as the ability of the 
borrower to repay the loan.\110\ Interest rates on loans are 
fixed and are determined based on the federal government's cost 
of borrowing.\111\ As of July 1, 2009, the interest rate on 
operating loans was 2.5 percent and the interest rate on real 
estate loans was 4.625 percent.\112\ There is also a ``limited 
resource'' interest rate available, and these ``limited 
resource'' loans are reviewed periodically to adjust the 
interest rate based on repayment ability.\113\
---------------------------------------------------------------------------
    \110\ U.S. Department of Agriculture, Farm Service Agency, Direct 
Loan Program (online at www.fsa.usda.gov/Internet/FSA_File/
flp_direct_farm_loans.pdf) (accessed July 8, 2009) (hereinafter ``FSA 
Direct Loan Information'').
    \111\ Id.
    \112\ U.S. Department of Agriculture, Farm Service Agency, Farm 
Loan Programs: Interest Rates (online at www.fsa.usda.gov/FSA/
webapp?area=home&subject=fmlp&topic=dfl-ir) (accessed July 8, 2009).
    \113\ FSA Direct Loan Information, supra note 110.
---------------------------------------------------------------------------
    FSA requires that direct loans be secured with collateral 
of 150 percent of the loan amount, if such collateral is 
available, and a minimum of 100 percent of the loan amount in 
any case.\114\ Collateral for operating loans consists of a 
first lien on crops to be produced or on livestock and 
equipment purchased with loan funds, though a lien can be taken 
on other chattel or real estate. FSA real estate loans must be 
secured by real estate. All FSA direct borrowers are required 
to refinance their loans with a private lender (such as a 
commercial bank or an FCS lender) when their finances 
permit.\115\
---------------------------------------------------------------------------
    \114\ FSA Direct Loan Information, supra note 110.
    \115\ FSA Direct Loan Information, supra note 110.
---------------------------------------------------------------------------
    The terms of FSA guaranteed loans must be negotiated 
between the lender (either a commercial bank or an FCS 
institution) and the borrower, though interest rates may not 
exceed the rate the institution charges its average farm 
customer.\116\ The type of collateral used to secure FSA 
guaranteed loans mirrors that needed to secure direct loans; 
FSA determines whether the collateral being proposed by the 
commercial lender is adequate for the loan to receive an FSA 
guarantee.\117\
---------------------------------------------------------------------------
    \116\ U.S. Department of Agriculture, Farm Service Agency, 
Guaranteed Loan Program (online at www.fsa.usda.gov/Internet/FSA_File/
guaranteed_farm_loans.pdf) (accessed July 8, 2009).
    \117\ Id.
---------------------------------------------------------------------------
    FSA-guaranteed loans remain with the lender; however, 
through Farmer Mac II, one of Farmer Mac's programs \118\ for 
the secondary market for agriculture loans, the government-
guaranteed portion of FSA-guaranteed loans can be resold 
(although the original commercial lender retains the 
responsibility for servicing the loan).\119\
---------------------------------------------------------------------------
    \118\ Farmer Mac and its programs are discussed infra, Section 2, 
Part (C)(2)(g).
    \119\ Id.
---------------------------------------------------------------------------
    In 2007, FSA held 2.33 percent of the total debt in the 
farm sector, totaling $4.93 billion, including 1.91 percent of 
farm real estate debt and 2.77 percent of non-real estate farm 
debt.\120\ FSA's overall share of farm debt peaked at 17 
percent during the 1980s farm crisis, but it has declined 
precipitously over the past two decades, indicative of the 
strength of the agriculture sector and the reduced need for 
farmers to turn to the lender-of-last resort for credit.\121\ 
While, as mentioned earlier, demand for FSA's programs has 
spiked in recent quarters, it remains unclear how or if this 
increased demand will impact the overall share of farm debt 
held by FSA, because the volume of FSA loans made is limited by 
congressional appropriations regardless of demand.
---------------------------------------------------------------------------
    \120\ USDA Farm Sector Income Forecast, supra note 69.
    \121\ USDA Farm Sector Income Forecast, supra note 69.
---------------------------------------------------------------------------

c. Life insurance companies

    Life insurance companies often hold mortgages among the 
assets backing their life, annuity, and health liabilities, and 
these companies are an additional source of credit to farmers, 
specializing in providing larger, farm real estate loans.\122\ 
In 2007, life insurance companies held $11.2 billion of farm 
real estate debt, or 10.35 percent of farm real estate debt 
outstanding.\123\ The share of farm real estate debt held by 
insurance companies has held steady in recent decades, 
comprising between ten and 13 percent of farm real estate debt 
every year since 1980.\124\
---------------------------------------------------------------------------
    \122\ American Council of Life Insurers, ACLI Life Insurers Fact 
Book 2008, at 7 (Oct. 31, 2009) (online at www.acli.com/ACLI/Tools/
Industry+Facts/Life+Insurers+Fact+Book/GR08-108.htm).
    \123\ USDA Farm Sector Income Forecast, supra note 69.
    \124\ USDA Farm Sector Income Forecast, supra note 69.
---------------------------------------------------------------------------

d. Individuals and others (including equipment and input suppliers)

    Not unlike the population of small businesses on the whole, 
many small, family farms rely on financing from family, 
friends, and neighbors to finance their operations and real 
estate purchases. In 2007, individuals and others held 10.18 
percent of all farm debt, including 7.79 percent of real estate 
debt and 12.66 percent of non-real estate debt.\125\ These 
figures include lending by niche lenders such as equipment and 
input suppliers (so-called ``captive finance companies.'')
---------------------------------------------------------------------------
    \125\ USDA Farm Sector Income Forecast, supra note 69; See also 
USDA Finance Outlook, supra note 5, at 49.
---------------------------------------------------------------------------
    Captive finance companies, such as John Deere (in the case 
of equipment) or seed and fertilizer suppliers, make credit 
available to farmers to finance the purchase of their products 
and, therefore, often enter into competition with commercial 
banks and other sources of farm credit. These companies 
sometimes offer direct lines of credit to farmers, but often 
credit is extended by smaller wholesalers and dealers selling 
supplier products to local or regional markets around the 
country. Recent data are lacking, but according to a 2004 
survey these smaller dealers typically receive financing from 
FCS institutions or commercial banks and then extend unsecured 
lines of credit for a year or less. Larger equipment and input 
suppliers typically utilize a completely different financing 
scheme. They have the ability to directly access the commercial 
paper markets or even to pursue securitization.\126\
---------------------------------------------------------------------------
    \126\ See Section C(4)(c), infra, for an analysis of credit 
availability in the captive finance sector.
---------------------------------------------------------------------------
    The percentage of overall farm debt held by these 
miscellaneous individuals and entities has progressively eroded 
over time, from its peak of 40 percent, in 1960, the first year 
for which data are available.\127\ This long-term trend is a 
result of the declining use of friend and family networks to 
finance farm real estate and operating expenses, as the years 
since 1960 have seen the American credit system become more 
developed and commercial bank and FCS credit become available 
to more people in all regions of the country. But nonetheless, 
certain subsectors of this category remain substantial credit 
providers, and niche lenders continue to make financing 
available to farmers. In 2008, total agriculture equipment 
sales reached $28.3 billion.\128\ $24.7 billion of this amount 
is estimated to be financed.\129\ The most recent historical 
data (comparing 2007 and 2008) showed 15.1 percent growth in 
agricultural equipment financing.\130\
---------------------------------------------------------------------------
    \127\ USDA Farm Sector Income Forecast, supra note 69.
    \128\ U.S. Department of Commerce, Bureau of Economic Analysis, 
Table 5.5.5U Private Fixed Investment in Equipment and Software by Type 
(June 26, 2009) (online at bea.doc.gov/national/nipaweb/
NIPA_Underlying/TableView.asp?SelectedTable=39&FirstYear=2008&LastYear=2
009 &Freq=Qtr).
    \129\ This estimate is calculated by multiplying total agriculture 
equipment sales by a propensity to finance percentage derived through 
research conducted by Global Insight. Equipment Leasing and Finance 
Foundation, Propensity to Finance Study (October 2007).
    \130\ Equipment Leasing and Finance Association, 2009 Survey of 
Equipment Finance Activity (July 14, 2009) (online at 
www.elfaonline.org/pub/news/press/pressreleases _report.cfm?ID=9873).
---------------------------------------------------------------------------

e. Farm Credit System

    The FCS was established in 1916 and its stated purpose is 
``to provide sound, dependable funding for agriculture and 
rural America.'' \131\ While the FCS is considered a Government 
Sponsored Enterprise (GSE), it is not explicitly guaranteed by 
the government and it is not a lender-of-last-resort but, 
rather, a for-profit lender that directly competes with 
commercial banks (though FCS does receive federal tax 
benefits). The system consists of five funding banks and 90 
lending associations, which are cooperatively owned by 
borrowers (including farmers, ranchers, agriculture 
cooperatives, rural utilities, and others).\132\ The FCS 
maintains its operations by selling system-wide debt securities 
into the capital markets, and the system banks and lending 
associations are regulated by FCA.
---------------------------------------------------------------------------
    \131\ Federal Farm Credit Banks Funding Corporation, The Farm 
Credit System Investor Presentation, at 3 (July 2009) (online at 
www.farmcredit-ffcb.com/farmcredit/serve/public/invest/present/
report.pdf?assetId=135941) (hereinafter ``July FCS Investor 
Presentation'').
    \132\ U.S. House Committee on Agriculture, Subcommittee on 
Conservation, Credit, Energy, and Research, Testimony of President of 
Mid-Atlantic Farm Credit Bob Frazee, To Review Credit Conditions in 
Rural America, 111th Cong., at 1 (June 11, 2009) (online at 
agriculture.house.gov/testimony/111/h061109sc/Frazee.doc) (hereinafter 
``Bob Frazee House Agriculture Testimony'').
---------------------------------------------------------------------------
    FCS institutions provide a variety of loan products to meet 
the credit needs of farmers and those in rural areas, and the 
purposes for which loans can be made, as well as guidelines for 
the terms of FCS loans, are defined by the Farm Credit Act of 
1971.\133\ Short-term production loans (generally for twelve 
months or less) are made to finance farmers' operating costs--
including inputs such as labor, feed, and fertilizer--during 
the farmers' typical production and marketing cycle. 
Intermediate-term loans, made for a specific term (generally 
ten years or less), are typically used to finance depreciable 
capital assets, such as farm machinery, vehicles, or breeding 
livestock. Finally, farm real estate loans are made for a term 
that ranges from five to 40 years.
---------------------------------------------------------------------------
    \133\ Farm Credit Act of 1971, as amended through Pub. L. No. 110-
246 (codified at 12 U.S.C. Sec. 23).
---------------------------------------------------------------------------
    FCS loans may be made with either a fixed or floating 
interest rate, and, among floating interest rate loans, there 
are two types: administered-rate loans (which may be adjusted 
periodically at the discretion of the lending institution) and 
indexed loans (which are adjusted periodically based on changes 
in specified indices). At the close of 2008, roughly 45 percent 
of the loan volume in the FCS consisted of floating rate loans, 
with the remaining 55 percent having fixed rates.\134\ FCS 
loans often have interest-rate caps that prevent the interest 
rate from rising above a certain level.
---------------------------------------------------------------------------
    \134\ Federal Farm Credit Banks Funding Corporation, Farm Credit 
System Annual Information Statement 2008, at 52 (Feb. 27, 2009) (online 
at www.farmcredit-ffcb.com/farmcredit/financials/statement.jsp) 
(hereinafter ``FCS 2008 Annual Information Statement'').
---------------------------------------------------------------------------
    With the exception of short-term operating loans, FCS loans 
are generally secured (though intermediate-term loans can be 
made on a secured or unsecured basis). Long-term real estate 
loans must be secured by first liens on the real estate, and 
the loans may be made only up to 85 percent of the appraised 
value of the property (97 percent of the appraised value if the 
loan is government-guaranteed).\135\ However, FCS has indicated 
that the actual loan-to-value ratio for farm real estate loans 
``is generally lower than the statutory maximum percentage.'' 
\136\
---------------------------------------------------------------------------
    \135\ Id., at 8.
    \136\ Id., at 8.
---------------------------------------------------------------------------
    The FCA requires that system institutions adopt written 
standards for prudent lending and effective collateral 
evaluation.\137\ In order to manage credit risk, FCS 
institutions consider the following in underwriting loans: 
borrower integrity, credit history, cash flows, equity, and 
collateral, as well as any off-farm sources of income that may 
affect or enhance the ability of the borrower to repay the farm 
loan.\138\ Each FCS institution must establish a ``lending 
limit,'' representing the maximum amount of credit that can be 
extended to one borrower or industry.
---------------------------------------------------------------------------
    \137\ Id., at 10.
    \138\ Id., at 10.
---------------------------------------------------------------------------
    Last, FCS institutions further manage risk by entering into 
agreements that provide long-term standby commitments to 
purchase FCS loans, such as agreements with Farmer Mac. As of 
December 31, 2008, $2.165 billion worth of FCS loans were under 
guarantees with Farmer Mac.\139\ Additionally, $1.447 billion 
in FCS loans were securitized (via exchanging them for mortgage 
backed securities issued by Farmer Mac) at the close of last 
year, though this figure represented a mere 0.90 percent of 
total FCS loans and leases outstanding at that time.\140\
---------------------------------------------------------------------------
    \139\ Id., at 12.
    \140\ Id., at 12.
---------------------------------------------------------------------------
    As of 2007, the FCS held 36.69 percent of total farm debt 
in the United States, including 42.08 percent of farm real 
estate debt and 31.09 percent of non-real estate farm 
debt.\141\ The FCS' overall share of farm debt has edged upward 
this decade, after a sustained period during which it held 
roughly 25 percent of farm debt--historically low for the FCS--
in the aftermath of problems in the FCS during the 1980s farm 
crisis.\142\
---------------------------------------------------------------------------
    \141\ USDA Farm Sector Income Forecast, supra note 69.
    \142\ USDA Farm Sector Income Forecast, supra note 69; For a 
discussion of problems in the FCS during the 1980s, see Roland E. 
Smith, Chief Examiner, Farm Credit System, Conditions in the Farm 
Credit System, Presented to the Farm Credit Administration Board (May 
14, 1998) (online at docs.google.com/
gview?a=v&q=cache:cLJ3fB2L9QcJ:www.fca.gov/PDFs/
FCS_Conditions_Report.pdf+Farm+Credit+System+1980s&hl=en≷=us).
---------------------------------------------------------------------------

f. Commercial banks

    While the credit needs of American farmers are served by 
two separate entities with specific mandates to extend credit 
to the agriculture sector--FSA and FCS--and life insurance 
companies, individuals, and captive finance companies also 
provide a significant share of farm loans, commercial banks--
large and small--remain a major source of farm credit. At the 
close of 2007, commercial banks held 45.42 percent of total 
farm debt--a larger share than any other source of credit.\143\ 
Commercial banks held 37.67 percent of farm real estate debt 
and a majority of non-real estate farm debt--53.47 
percent.\144\ The overall share of farm debt held by commercial 
banks has stayed fairly constant this decade, but it is up 
considerably from the roughly 25 percent share held by banks in 
the mid-1980s.\145\
---------------------------------------------------------------------------
    \143\ USDA Farm Sector Income Forecast, supra note 69.
    \144\ USDA Farm Sector Income Forecast, supra note 69.
    \145\ USDA Farm Sector Income Forecast, supra note 69.
---------------------------------------------------------------------------
    However, less is known about characteristics of farm loans 
at commercial banks and trends in commercial bank lending to 
the agriculture sector because of a lack of standardized data 
and reporting. While the government tracks and collects certain 
information about the farm sector and its programs (and, as a 
GSE, the FCS is required to collect certain information as 
well), bank lending to farmers does not abide by rigid 
constraints, and the existence of fewer farm-specific reporting 
requirements for commercial banks than FSA and FCS makes the 
interface of banks with the farm sector much more opaque.
    Further, the unique nature of the farm sector makes it 
difficult to describe any characteristics of farm loans made by 
commercial banks as ``typical.'' Indeed, the variety in the 
terms of credit extended to farmers mirrors the variety in the 
credit needs of farmers more generally, with farmers requiring 
credit for short-term operating expenses, intermediate-term 
equipment and livestock purchases, and long-term real estate 
costs. However, several distinguishing characteristics 
generally hold true across the industry.
    On the whole, farm loans share more similarities with 
commercial loans than they do with residential mortgages, with 
banks extending credit on terms and with amortizations that 
tailor to the unique needs of individual borrowers, and 
providing financing that matches the useful life of what it is 
that is being financed (whether for a yearly cycle of corn, a 
dairy cow, or a piece of farm equipment). Also unlike the 
residential mortgage market, farm loan products have remained 
quite traditional, not seeing exotic loan products in recent 
years--though the trend has been away from fixed rate financing 
and toward loans with floating rates.\146\
---------------------------------------------------------------------------
    \146\ Second Quarter Fed Databook, supra note 2, at 19 (A.6 Share 
of Non-Real-Estate Bank Loans with a Floating Interest Rate Made to 
Farmers).
---------------------------------------------------------------------------
    Banks traditionally seek an abundance of collateral when 
extending credit to farmers, and they will cross-collateralize, 
using real estate as collateral to secure loans for operating 
and production purposes, and seeking additional collateral on 
short-term operating loans whenever possible. Additionally, 
banks require a relatively high equity cushion when making farm 
loans, with loan-to-value ratios in excess of 60-70 percent of 
the appraised value of the property a rarity for farm real 
estate loans. Testimony at the Panel's field hearing in 
Greeley, CO, confirmed the conservative nature of farm lenders, 
who, knowing the vicissitudes of the agriculture sector, are 
generally reluctant to lend to those not in a relatively strong 
debt-to-equity position and thus tend to create a ``larger 
buffer, or margin,'' between the loan and the value of the of 
the land, equipment, or products being financed.\147\
---------------------------------------------------------------------------
    \147\ Congressional Oversight Panel, Testimony of Senior Vice 
President of New West Bank Lonnie Ochsner, COP Field Hearing in 
Greeley, CO on Farm Credit (July 7, 2009) (online at cop.senate.gov/
hearings/library/hearing-070709-farmcredit.cfm) (``However, in the 
ag[riculture] industry, it is cyclical and good, prudent ag[riculture] 
lenders have created a larger buffer, if you will, or 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.'').
---------------------------------------------------------------------------
    Beyond looking at collateral and requiring high equity 
cushions when making loans to farmers--and in keeping with the 
idea that farms are not merely properties but often 
businesses--banks typically conduct a financial statement 
analysis of prospective borrowers when making loans, including 
looking at the balance sheet, income statement, statement of 
cash flows, and statement of owner equity.\148\
---------------------------------------------------------------------------
    \148\ Farm Financial Standards Council, Financial Guidelines for 
Agricultural Producers (accessed July 8, 2009) (online at www.ffsc.org/
cd_news_release.pdf).
---------------------------------------------------------------------------
    i. Bank Size. The farm credit market is served by all sizes 
of commercial banks, though very large and very small banks 
play a disproportionate role in extending credit to farmers. As 
of March 31, 2009, 8,256 commercial banks held farm loans, and 
the top 16 lenders to farmers--representing less than two-
tenths of one percent of banks making loans to farmers--held 
21.67 percent of total agriculture loans, including 16.91 
percent of farm real estate loans and 27.15 percent of non-real 
estate farm loans.\149\ For their part, the 71 banks with total 
assets exceeding $10 billion as of March 3, 2009, held 20.38 
percent of farm loans (also demonstrating that several of the 
largest farm lenders are not among the largest banks in the 
country).\150\
---------------------------------------------------------------------------
    \149\ Federal Deposit Insurance Corporation, Statistics on 
Depository Institutions from Quarterly Reports of Condition and Income 
for the Quarter Ending March 31, 2009 (accessed July 8, 2009) (online 
at www2.fdic.gov/sdi/index.asp) (hereinafter ``FDIC First Quarter Call 
Report Data'').
    \150\ Id.
---------------------------------------------------------------------------
    On the other hand, 5,547 commercial banks with total assets 
under $1 billion held 64.25 percent of loans to farmers--65.98 
percent of real estate and 62.26 percent of non-real estate 
loans--and 5,043 banks with total assets under $500 million 
held 53.88 percent of loans to farmers--54.04 percent of real 
estate and 53.69 percent of non-real estate loans.\151\ These 
5,043 banks with total assets under $500 million represent a 
mere 6.65 percent of the total assets of all banks extending 
credit to the agriculture sector--demonstrating the critical 
role that small, community banks across the country play in the 
farm credit markets.\152\
---------------------------------------------------------------------------
    \151\ Id.
    \152\ Id.
---------------------------------------------------------------------------

      Figure 20: Percent of Agricultural Loans by Bank Size \153\

---------------------------------------------------------------------------
    \153\ Id.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    

    ii. Farm Size. The diversity of the American agriculture 
sector makes for diverse credit needs for farms large and 
small, specializing in products ranging from commodity crops to 
livestock. Further, some agricultural lenders are generally 
more suited to the specific needs of a certain type of farm or 
farmer than others. For instance, while an FSA direct or 
guaranteed loan may be a suitable credit source of last resort 
for a small family farm, the size limits on those loans often 
preclude larger farms from turning to FSA to fulfill their 
credit needs. Moreover, the specialized FCS, with its 
government mandate to serve the needs of farmers and rural 
America, may be a better option for larger farmers, while 
smaller farmers--with a higher percentage of non-farm income--
may find it more practical to obtain a loan from the local bank 
that they use for their non-farm banking and credit needs.
    Data confirm that, taken on the whole, small family farmers 
are more likely to use commercial banks as their principal 
source of credit than larger and nonfamily farmers. 
Specifically, according to USDA data, 66.1 percent of 
``retirement'' farmers, 57.7 percent of ``residential or 
lifestyle'' farmers, and 54.3 percent of low-sales family 
farmers report using commercial banks for credit, while 44.7 
percent of medium-sales family farmers, 48.0 percent of large-
sale family farmers, 43.2 percent of very large-sale family 
farmers, and 41.4 percent of nonfamily farmers report using 
commercial banks for credit.\154\
---------------------------------------------------------------------------
    \154\ U.S. Department of Agriculture, Economic Research Service, 
Structure and Finances of U.S. Farms: Family Farms Report, at 20 (June 
2007) (online at www.ers.usda.gov/publications/eib24/eib24.pdf).
---------------------------------------------------------------------------

  Figure 21: Percent of Farmers Reporting Using a Commercial Bank for 
                              Credit \155\

---------------------------------------------------------------------------
    \155\ Id.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    

    iii. TARP and Non-TARP Banks. A critical aspect of 
determining the potential effectiveness of any loan 
restructuring program to be carried out by TARP-recipient 
banks--the congressional mandate underlying this report--is 
determining the percentage of farm loans held by TARP banks. As 
of March 31, 2009, commercial banks that have received TARP 
dollars held 28.76 percent of the slice of total farm loans 
held by commercial banks.\156\ Breaking it down by types of 
farm loans, TARP-recipient banks held 27.46 percent of the 
portion of farm real estate loans made by commercial banks and 
30.26 percent of non-real estate farm loans made by banks.\157\ 
Banks receiving funding through the TARP were responsible for 
71 percent of the total assets in the U.S. banking system as of 
March 31, 2009; therefore, relative to their assets, TARP-
recipient banks are generally less involved in agriculture 
lending.\158\
---------------------------------------------------------------------------
    \156\ FDIC First Quarter Call Report Data, supra note 149; U.S. 
Department of the Treasury, Troubled Asset Relief Program Transactions 
Report for Period Ending June 26, 2009 (June 30, 2009) (online at 
www.financialstability.gov/docs/transaction-reports/transactions-
report_063009.pdf) (hereinafter ``TARP Transactions Report'').
    \157\ Id.
    \158\ Id.
---------------------------------------------------------------------------
    At that time, the top 21 recipients of TARP dollars (the 
institutions for which Treasury tracks detailed lending 
statistics in its Monthly Lending and Intermediation Snapshot), 
held 16.95 percent of the portion of farm debt held by 
commercial banks--13.10 percent of bank-held farm real estate 
debt and 21.36 percent of bank-held non-real estate farm 
debt.\159\ The largest TARP-recipient lender to the agriculture 
sector--and, indeed, the largest commercial bank farm lender--
is Wells Fargo, whose holding company alone (which includes 
Wachovia Bank), held 7.68 percent of commercial bank farm 
debt--4.86 percent of real estate and 10.93 percent of non-real 
estate bank farm debt.\160\
---------------------------------------------------------------------------
    \159\ Id. 
    \160\ Id.
---------------------------------------------------------------------------
    iv. Foreign Owned Banks. Given that foreign owned banks 
hold approximately ten percent of total loans and leases 
outstanding in the U.S. banking system, it deserves mention 
that the share of farm loans held by foreign owned banks--which 
are ineligible for funding through the TARP--cuts into the pool 
of farm loans that could potentially be affected by any TARP-
based loan restructuring mandate.\161\ Indeed, two of the five 
largest commercial bank agricultural lenders in the United 
States are headquartered abroad--Bank of the West and Rabobank. 
These two foreign owned banks alone account for slightly less 
than 4 percent of all commercial bank agriculture lending.\162\
---------------------------------------------------------------------------
    \161\ Board of Governors of the Federal Reserve System, Statistical 
Release H.8 Assets and Liabilities of Commercial Banks in the United 
States (July 2, 2009) (online at www.federalreserve.gov/releases/h8/
Current/).
    \162\ FDIC First Quarter Call Report Data, supra note 149.
---------------------------------------------------------------------------

g. Other players in the farm credit markets

    Although they do not provide credit directly to farm 
borrowers, Farmer Mac and the Federal Home Loan Banks play an 
important role in making credit available to key agricultural 
lenders.
    i. Farmer Mac. The Federal Agricultural Mortgage 
Corporation (Farmer Mac) was created by Congress in 1987 via 
passage of the Agricultural Credit Act. Farmer Mac is a GSE 
whose mission is to provide liquidity in the ``secondary market 
for agriculture real estate and rural housing mortgage loans.'' 
\163\ Congress expanded Farmer Mac's mission in 2008 via 
passage of the Food, Conservation, and Energy Act (commonly 
known as the 2008 Farm Bill) ``to purchase, and to guarantee 
securities backed by, loans made by cooperative lenders to 
cooperative borrowers to finance electrification and 
telecommunications systems in rural areas.'' \164\
---------------------------------------------------------------------------
    \163\ Federal Agricultural Mortgage Corporation, 2008 Annual Report 
(accessed July 7, 2009) (online at www.farmermac.com/investors/pdf/ar/
annual_2008.pdf) (hereinafter ``Farmer Mac 2008 Annual Report'').
    \164\ Id. 
---------------------------------------------------------------------------
    Very simply, Farmer Mac purchases qualified agriculture 
loans, pools them into securities, and then either holds those 
securities in its portfolio or sells them to investors in the 
secondary market, much like Fannie Mae and Freddie Mac do for 
qualified home mortgage loans.\165\ In addition to purchasing 
loans, Farmer Mac issues long-term standby purchase agreements, 
whereby it promises to purchase a certain number of loans from 
the lender. Farmer Mac provides these services through three 
main programs: Farmer Mac I (loans not guaranteed by USDA); 
Farmer Mac II (USDA guaranteed loans); and Rural Utilities 
(rural utilities loans). The total volume in these three 
programs stands at over $9.9 billion.
---------------------------------------------------------------------------
    \165\ Federal Agricultural Mortgage Corporation, Farmer Mac 
Programs (accessed July 7, 2009) (online at www.farmermac.com /lenders/
fmacprograms/farmermacprograms.aspx).
---------------------------------------------------------------------------
    Farmer Mac is part of the FCS and regulated by the FCA. It 
is not liable for the debt of any other institution within the 
FCS and, therefore, is also considered its own GSE. As a GSE, 
Farmer Mac enjoys having an implicit government guarantee, and 
the debt that Farmer Mac issues to raise funding for its 
operations is priced as such. As of March 31, 2009, Farmer Mac 
had total liabilities of $4.566 billion. It also had core 
capital of $250 million, which is $67 million above its minimum 
statutory capital requirement of $183 million.\166\
---------------------------------------------------------------------------
    \166\ Federal Agricultural Mortgage Corporation, Form 10-Q for the 
Quarterly Period Ended March 31, 2009, at 30 (May 12, 2009) (online at 
www.farmermac.com/investors/pdf/10Q/Q1-2009-10-Q.pdf).
---------------------------------------------------------------------------
    As mentioned above, Farmer Mac securitizes and issues 
purchase commitments on over $9.9 billion in agricultural 
loans. Of these assets, the GSE holds roughly $3.1 billion in 
mission-related assets (Farmer Mac guaranteed securities and 
loans) on its portfolio.\167\ Comparatively, Fannie Mae and 
Freddie Mac securitize and guarantee over $5.4 trillion in 
mortgage loans. These two GSEs combined hold over $1.5 trillion 
in mission related assets (mortgage loans and securities) on 
their portfolios.\168\ Farmer Mac lost $106 million in 2008 due 
to its investments in Fannie Mae and Lehman Brothers. These 
losses, among other pressures, spurred it to raise new capital 
and replace its CEO. As Farmer Mac works to shore up its 
capital position, it can be expected to sell off assets, 
including loans, on its balance sheet.\169\ Thus, its secondary 
market function may be less than it has been. Yet the 
agricultural loan secondary market has never been as robust nor 
as large as the secondary market for home loans. This moderates 
the impact on credit availability of any financial difficulties 
faced by Farmer Mac.
---------------------------------------------------------------------------
    \167\ Id.
    \168\ Federal Housing Finance Agency, Report to Congress 2008 (May 
18, 2009) (online at www.fhfa.gov/webfiles/2331/
FHFAReportToCongress2008final.pdf).
    \169\ On March 31, 2009, Rabobank announced plans to purchase a 
$354 million portfolio of agricultural loans from Farmer Mac. Rabobank, 
Rabobank to Acquire $354 Million Portfolio from Farmer Mac (Mar. 30, 
2009) (online at www.rabobankamerica.com/content/documents/news/2009/
rabobank_to_acquire_354_million_portfolio_from_farmer_mac.pdf).
---------------------------------------------------------------------------
    ii. Federal Home Loan Banks. Congress created the Federal 
Home Loan Bank System (FHLB System) in 1932 through the Federal 
Home Loan Bank Act. The FHLB system is made up of 12 
cooperative banks or Federal Home Loan Banks (FHLBs), each 
representing a district within the United States. The system is 
a GSE and all 12 FHLBs have joint and several liability for 
each other. The FHLB's primary purpose is to provide liquidity 
to its member institutions. The FHLB System has over 8,100 
member institutions, comprising 5,861 commercial banks, 1,217 
thrifts, 896 credit unions, and 145 insurance companies.\170\ 
To become a member, an institution must own stock within its 
particular district FHLB.
---------------------------------------------------------------------------
    \170\ Council of Federal Home Loan Banks, The Federal Home Loan 
Banks (accessed July 17, 2009) (online at www.fhlbanks.com/assets/pdfs 
/sidebar/FHLBanksWhitePaper.pdf).
---------------------------------------------------------------------------
    FHLBs provide liquidity to their member institutions by 
offering short-term loans called advances. In order to qualify 
for the advances, member institutions must offer in exchange 
certain types of pledged assets or collateral. Previously, 
pledged collateral had to be in the form of mortgage loans or 
government securities. However, the Federal Home Loan Bank 
System Modernization Act of 1999, which was Title VI of the 
Gramm-Leach-Bliley Act, expanded the type of pledged collateral 
small member institutions could offer and allowed the FHLBs to 
make advances secured by agricultural, small business, and 
community development loans, as well.\171\ The amount of FHLB 
outstanding advances has increased steadily throughout the 
years, rising from $581.2 billion in 2004 to $619.9 billion in 
2006, $640.7 billion in 2006, $875 billion in 2007, and $928.64 
billion in 2008.\172\ However, the number dropped by nearly 12 
percent to $817.4 billion in the first quarter of 2009, which 
is likely indicative of the overall tightening of credit 
availability in the banking system.\173\
---------------------------------------------------------------------------
    \171\ Gramm-Leach-Bliley Act of 1999, Pub. L. No. 106-102.
    \172\ Federal Home Loan Bank System, Office of Finance, Quarterly 
Combined Financial Report for the Six Months Ended June 30, 2008 (Aug. 
13, 2008) (online at www.fhlb-of.com/specialinterest/
finreportframe.html).
    \173\ Id.
---------------------------------------------------------------------------

    3. EFFECT OF THE BROADER FINANCIAL CRISIS ON FARM CREDIT MARKETS

    In the fall of 2008, much of the world plunged into 
arguably the worst economic crisis since the Great Depression. 
While the U.S. agricultural credit sector remains stronger than 
the overall credit system,\174\ it is not immune from 
turbulence in the broader economy. For example, in the first 
quarter 2009, the overall commercial bank delinquency rate was 
5.60 percent, compared to an agricultural loan delinquency rate 
of 1.71 percent during the same period.\175\ Also in the first 
quarter 2009, the percentage of banks reporting at least the 
same availability of funds for farm operating loans as last 
year remained steady.\176\ In other credit sectors, first 
quarter 2009 was much worse. During that quarter, 79.2 percent 
(net) of senior lending officers reported tightening standards 
for commercial real estate loans and 58.8 percent reported 
doing the same for household credit cards.\177\
---------------------------------------------------------------------------
    \174\ See, e.g., Paul N. Ellinger, Financial Markets and 
Agricultural Credit at a Time of Uncertainty, Choices: The Magazine of 
Food, Farm, and Resource Issues, at 33 (First Quarter 2009) (online at 
www.choicesmagazine.org/magazine/article.php?article=61) (``Relative to 
other financial intermediaries, agricultural lenders generally remain 
healthy.'').
    \175\ Board of Governors of the Federal Reserve System, Charge-off 
and Delinquency Rates on Loans and Leases at Commercial Banks (accessed 
July 8, 2009) (online at www.federalreserve.gov/releases/chargeoff/
delallsa.htm).
    \176\ Second Quarter Fed Databook, supra note 2.
    \177\ Board of Governors of the Federal Reserve System, Senior Loan 
Officer Opinion Survey on Bank Lending Practices (May 4, 2009) (online 
at www.federalreserve.gov/BoardDocs/SnLoanSurvey/200905/chartdata.htm).
---------------------------------------------------------------------------
    However, since the beginning of the year, surveys of 
agricultural credit institutions show indications of both more 
repayment problems for existing loans and tighter lending 
standards on new originations.\178\ Delinquency rates for 
commercial bank farm real estate loans jumped from 1.7 percent 
in first quarter 2008 to 2.8 percent in first quarter 2009, 
their highest level since first quarter 2003. There was double 
digit growth in the percent of banks reporting higher 
collateral requirements for non-real estate farm loans in three 
surveying Federal Reserve Districts (12 percent, 15 percent, 
and 13 percent, respectively) between the first quarters of 
2008 and 2009.\179\
---------------------------------------------------------------------------
    \178\ Second Quarter Fed Databook, supra note 2.
    \179\ Second Quarter Fed Databook, supra note 2.
---------------------------------------------------------------------------
    The financial crisis and recession weakened virtually every 
part of the overall credit market. As indicated above, the farm 
credit market is in a weaker state as compared to one year ago. 
Thus, the U.S. farm credit market currently faces a crucial 
transition moment: Agriculture lenders in most regions enjoyed 
strong performances over the past few years, with historically 
low delinquency rates and ample credit availability. The 
agriculture credit markets now face rising delinquency and 
tighter lending standards, although today's situation remains 
within historical parameters. The key question is whether the 
global financial crisis will continue to prompt, and even 
possibly accelerate, these downward trends beyond historical 
averages within the sector.

a. Commodity prices

    Farm product prices declined 15 percent in June 2009 from 
their June 2008 index values.\180\ Certain individual 
commodities have seen prices fall even faster and even 
farther.\181\ Consequently, commodity price declines are one of 
the significant factors contributing toward the projected 20 
percent decline in net farm income in 2009, a steep drop off 
for farmers to bear even though it would still leave net income 
above a running ten-year average.\182\ Lower net income 
restricts a farmer's cash flow and thus both increases the risk 
of non-performance on current debt and makes it harder to 
obtain new credit. While the economy remains in recession, the 
U.S. agriculture industry can expect the continued possibility 
of weak demand and downward pressure on prices.\183\ Over the 
long-term, the outlook is equally unsettled. A growing global 
population needs to eat, so a lack of demand is unlikely to be 
a problem.\184\ However, other factors (chief among them the 
value of the dollar, as discussed earlier) may limit how much 
U.S. farmers can take advantage of rising prices should demand 
rise as expected.\185\ Thus, lower commodity prices are very 
likely to negatively impact farm credit in the near-term while 
the long-term trend remains uncertain.
---------------------------------------------------------------------------
    \180\ USDA June Agricultural Prices, supra note 68.
    \181\ This is particularly true in the livestock sector where the 
dairy industry has been particularly hard hit (prices in June plunged 
41 percent from their position a year ago) along with, to a lesser 
extent, the hog, poultry, and cattle industries.
    \182\ See Section B(1), supra, for a complete discussion of farm 
income.
    \183\ Thus short-term predictions for commodity prices depend 
heavily on the accuracy of assumptions as to the duration and severity 
of the economic crisis. See OECD-FAO Outlook, supra note 53.
    \184\ OECD-FAO Outlook, supra note 53. The OECD-FAO report argues 
that the worldwide agriculture sector is poised for renewed growth 
assuming economic recovery occurs within 2-3 years. The USDA's own 
income projections also show a short-term dip in income followed by 
renewed growth through the rest of the time frame. See USDA Economic 
Research Service, USDA Agricultural Projections to 2018 (Feb. 12, 2009) 
(online at www.ers.usda.gov/publications/oce091/).
    \185\ U.S. Department of Agriculture, Economic Research Service, 
The 2008/2009 World Economic Crisis: What It Means for U.S. 
Agriculture, at 27 (Mar. 2009) (online at www.ers.usda.gov/
Publications/WRS0902/WRS0902.pdf.).
---------------------------------------------------------------------------
    The agriculture economy is far from a monolithic area, both 
in terms of commodity and geography. The Panel recognizes that 
due to the cyclical and counterbalanced nature of the 
agriculture market, certain commodities may be in greater 
distress at any particular time compared to the sector as a 
whole. It is quite common for one or more sub-sectors or 
geographic regions, even in good times, to experience problems 
even while the overall industry remains generally healthy. This 
can result in credit pressures for lenders with portfolios 
concentrated on one sub-sector or region.

b. Longer-term fixed-rate financing availability

    Due to tightening credit conditions, farmers face greater 
difficulty in obtaining desirable long-term, fixed-rate term 
loans, according to representatives of the FCS and its 
regulator.\186\ However, at the moment, Federal Reserve data 
offer only lukewarm support for extending these statements to 
commercial banks. The floating interest rate share of total 
farm operating loans is elevated, with the implication that the 
fixed interest rate loan share would be lower, but not above 
historical levels. Further, average maturity on farm operating 
loans actually rose for the second quarter of 2009, although it 
is lower than it has been since 2006.\187\
---------------------------------------------------------------------------
    \186\ Bob Frazee House Agriculture Testimony, supra note 132, at 8; 
House Agriculture Committee, Subcommittee on Conservation, Credit, 
Energy, and Research, Testimony of Chairman and Chief Executive Officer 
of the Farm Credit Administration Leland A. Strom, To Review Credit 
Conditions in Rural America, at 2 (online at agriculture.house.gov/
hearings/statements.html) (``Fixed-rate term loans are more difficult 
to obtain.'') (hereinafter ``Leland Strom House Agriculture 
Testimony'').
    \187\ Second Quarter Fed Databook, supra note 2, A.4 Average 
Maturity of Non-real-estate Bank Loans and A.6 Share of Non-real-estate 
Bank Loans with a Floating Interest Rate. Considering these tables 
together, one possibility is a trend toward more long-term variable 
rate loans.
---------------------------------------------------------------------------
    If there is a trend away from long-term fixed-rate 
financing, two negative implications for agricultural operators 
should be noted. First, it keeps farmers from locking in 
currently low interest rates, which are generally as low as at 
any point in the past two decades.\188\ Second, it places more 
pressure on current cash flow, as farmers are forced to use 
shorter maturity debt that takes up a relatively larger portion 
of resources at any given time. As noted above, decreased cash 
flow makes new credit more expensive to obtain and increases 
the risk of repayment problems.
---------------------------------------------------------------------------
    \188\ Second Quarter Fed Databook, supra note 2, C.4 Average Fixed 
Interest Rates on Farm Loans. Variable rates are also low at the 
moment. See Second Quarter Fed Databook, supra note 2, C.5 Average 
Variable Interest Rates on Farm Loans. Thus, this problem may only 
gradually become more apparent in the future, when farmers excluded 
from fixed-rate loans now are forced to face higher variable rates 
later, assuming interest rates eventually begin to climb again.
---------------------------------------------------------------------------

c. Loan underwriting and documentation

    Both observers and lenders themselves agree that commercial 
lending standards are tighter as a result of the financial 
crisis.\189\ However, it is unclear whether this trend extends 
to all parts of the farm credit market. FSA is the lender of 
last resort and has statutory lending standards designed to 
support those unable to obtain credit elsewhere.\190\ In May, 
its then-Administrator noted much higher demand for its loans 
so far in 2009: 81 percent higher for direct operating loans 
and 132 percent higher for direct real estate loans.\191\ FCS 
members report unchanged lending standards despite the 
financial crisis, although their regulator has testified that 
weak debt markets will force FCS institutions into more 
conservative lending.\192\ News reports offer anecdotal 
examples of farmers draining retirement savings or accumulating 
credit card debt in the face of fewer available long-term 
loans.\193\
---------------------------------------------------------------------------
    \189\ See, e.g., House Agriculture Committee, Subcommittee on 
Conservation, Credit, Energy and Research, Testimony of President and 
CEO of Farmers Bank Fred Bauer on behalf of the Independent Community 
Bankers of America, To Review Credit Conditions in Rural America, 111th 
Cong., at 3 (June 11, 2009) (online at agriculture.house.gov/hearings/
statements.html) (``81 percent [of community banks] have tightened 
their credit standards since the start of the crisis.'') (hereinafter 
``Fred Bauer House Agriculture Testimony'').
    \190\ See 7 U.S.C. Sec. 1922 for statutory lending requirements.
    \191\ FSA June Testimony, supra note 41, at 2. In discussions with 
FSA economists and farm groups, other contributing factors for 
increased demand were discussed beyond less credit availability in the 
wider market. They include: higher application volume in anticipation 
of increased Congressional appropriations and the 2008 Farm Bill's 
increase in the maximum direct loan size from $200,000 to $300,000.
    \192\ Congressional Oversight Panel, Testimony of Senior Vice 
President and Corporate Secretary of Farm Credit Services of the 
Mountain Plains Mike Flesher, COP Field Hearing in Greeley, CO on Farm 
Credit, at 3 (July 7, 2009) (online at cop.senate.gov/documents/
testimony-070709-flesher.pdf) (``Mountain Plains . . . has not changed 
its lending standards in response to the current financial and economic 
disruption.) (hereinafter ``Mike Flesher COP Testimony); The FCS 
representative testifying before the House Agriculture Committee on 
June 11, 2009 made a similar statement. See Leland Strom House 
Agriculture Testimony, supra note 186 (``Lenders are naturally becoming 
more cautious and conservative on the extension of credit.''); Federal 
Farm Credit Banks Funding Corporation, Farm Credit System Quarterly 
Information Statement--First Quarter 2009, at 15 (May 7, 2009) (online 
at www.farmcreditffcb.com/farmcredit/serve/public/finin/quarin/
report.pdf?assetId=132506) (``System managements have made a decision 
to slow loan growth.'') (hereinafter ``FCS First Quarter 2009 
Statement).
    \193\ Lauren Etter, Farmers Start to Feel Credit Pinch, Wall Street 
Journal (May 19, 2009) (online at online.wsj.com/article/
SB124268924963032355.html).
---------------------------------------------------------------------------
    Increased demand for FSA loans might suggest tougher 
standards at commercial banks and FCS institutions, as FSA 
borrowers must be unable to obtain a loan from another 
source.\194\ Likewise, Federal Reserve data indirectly support 
the conclusion that underwriting and documentation standards 
are tighter. Collateral requirements for lending are higher and 
referrals to non-bank lenders (such as FSA) are up.\195\ Even 
putting aside the pressure the overall economic situation 
places on lending standards, loan officers faced with reduced 
farm cash flows are likely to continue tightening their 
standards and asking for additional documentation.
---------------------------------------------------------------------------
    \194\ However, it need not mechanically show tighter standards at 
these institutions. There are other possible reasons for increased FSA 
applications. See note 191, supra.
    \195\ Second Quarter Fed Databook, supra note 2, C.1 Non-real-
estate Farm Lending Compared with a Year Earlier and C.3 Indicators of 
Relative Credit Availability.
---------------------------------------------------------------------------
    Market participants express mixed views with regard to why 
underwriting standards are elevated. Community banks, who often 
carry sizeable agriculture portfolios, argue that overly 
cautious bank regulators have pressured them to unnecessarily 
restrict new lending.\196\ On the other hand, agricultural 
economists at the Federal Reserve report banks tightening 
credit standards on their own, exhibiting caution due to 
turbulent economic events and their own increased costs in 
obtaining funding from the bond markets.\197\ Whether the cause 
is direct decision-making or nervous supervisors applying 
pressure, clearly tighter farm credit can be at least partially 
attributable to turmoil in the economy away from the farm.
---------------------------------------------------------------------------
    \196\ Fred Bauer House Agriculture Testimony, supra note 189, at 3 
(``They also feel the government is dissuading them from lending by 
putting them through overzealous regulatory exams.'').
    \197\ Henderson Article, supra note 27, at 73-74.
---------------------------------------------------------------------------

d. Unemployment

    U.S. unemployment reached 9.5 percent by June 2009.\198\ 
Seventy percent of farm households have an operator or a spouse 
engaged in off-farm employment.\199\ Especially for smaller 
family farms, the trend is toward ever greater reliance on non-
farm income sources. In fact, only the eight percent of farms 
with sales greater than $250,000 a year derive more income from 
the farm, on average, than from off-farm sources.\200\ Thus, 
despite the recent strength of the U.S. farm economy, problems 
in the larger rural economy certainly affect the agriculture 
sector, and especially smaller producers.
---------------------------------------------------------------------------
    \198\ U.S. Department of Labor, Bureau of Labor Statistics, 
Employment Situation Summary June 2009 (July 2, 2009) (online at 
www.bls.gov/news.release/empsit.nr0.htm).
    \199\ USDA Finance Outlook, supra note 5, at 31.
    \200\ USDA Finance Outlook, supra note 5, at 31.
---------------------------------------------------------------------------
    Given the farm sector's increasing reliance on off-farm 
employment, regional employment market stability becomes a key 
factor in predicting the direction of farm credit. When a 
town's central business district faces higher unemployment, 
these troubles radiate out to its surrounding farmland and 
increase the risk of loan repayment issues. In the modern, 
interconnected economy, the farm sector cannot escape larger 
employment troubles. However, as of this spring, USDA noted 
that 39 percent of farm operators and 71 percent of spouses are 
employed in retail, services, government, education, or health, 
which in USDA's opinion, represent employment sectors that are 
more stable than hard-hit industries like construction and 
manufacturing, as well as many of the more volatile agriculture 
sectors, as well.\201\ Given that, according to USDA, 95 
percent of the average farm family's income is from off-farm 
sources. If this employment stability is real, then off-farm 
employment could actually function as a means of limiting 
delinquency in the event of farm net cash flow issues. Close 
attention should also be paid to farmland values; a significant 
decline in real estate equity could further expose non-farm 
unemployment issues by removing a current cushion against 
problems like unemployment or a decline in wages.
---------------------------------------------------------------------------
    \201\ USDA Crisis Impact Report, supra note 6, at 20.
---------------------------------------------------------------------------

                 4. CREDIT AVAILABILITY MOVING FORWARD

    The different providers of farm credit face differing 
challenges in determining the availability of credit going 
forward. Three key factors inevitably influence how much credit 
they will extend. One is the state of both the agricultural and 
general economy. Even government appropriators indirectly set 
loan funding based on external economic conditions. The other 
major players, the FCS, commercial banks, and life insurance 
companies, must respond to market conditions in a way that 
allows them to maximize return on investment. With respect to 
commercial banks in particular, stresses on bank capital due to 
market conditions also could play a role in the availability of 
credit for farmers, as discussed later in the report. The 
second factor is farmland real estate prices. Up to the 
present, appreciating land values have been a substantial 
countervailing force for maintaining a relatively robust farm 
credit market in the face of larger economic storm clouds. 
Rising equity helps to make up for declining net cash income 
and rising off-farm unemployment. If real estate values fall 
substantially in the future, credit availability would likely 
tighten. The final factor is the capital strength of the 
lending institution. A weakly capitalized commercial bank or 
FCS institution will not have the capacity to maintain or 
expand credit availability moving forward.\202\
---------------------------------------------------------------------------
    \202\ See section C.4.d.ii, infra, for further discussion of 
commercial bank capital strength and its impact on credit availability.
---------------------------------------------------------------------------

a. Government programs

    FSA loan funding levels depend on congressional 
appropriations. Of course, in times of agricultural or general 
market problems, Congress faces pressure to increase its 
appropriations to the direct and guaranteed loan programs as a 
backstop against decreases in commercial or FCS lending. Thus, 
FSA credit availability is at least indirectly affected by 
external credit conditions. Recently, Agriculture Secretary 
Vilsack announced the availability of over $760 million in 
additional funds this year for direct real estate and operating 
loans.\203\ The funding was made available through the 
Supplemental Appropriations Act of 2009 \204\ and is designed 
to both remove a backlog of approved but unfunded loans as well 
as allow for new originations. FSA reports demand for agency 
loans reaching its highest level in two decades.\205\ The 
increased loan demand likely comes from a loss of credit 
availability, as well as the additional funding for FSA loans, 
expansions of the maximum loan levels, or increased refinancing 
activity.\206\
---------------------------------------------------------------------------
    \203\ U.S. Department of Agriculture, Agriculture Secretary Vilsack 
Announces Availability of $760 million in Direct Loans to Farmers and 
Producers (July 16, 2009) (online at www.usda.gov/wps/portal/!ut /p/
s.7_O_A/7_O_1RDprintable=true&contentidonly =true&contentid=2009/07/
0313.xml).
    \204\ Pub. L. No. 111-32.
    \205\ FSA June Testimony, supra note 41; Scuse Testimony, supra 
note 64.
    \206\ See FSA June Testimony, supra note 41 at 1 (``Activity in 
FSA's loan programs certainly indicates that less commercial credit is 
available to farmers at the present time.''). The possible alternative 
explanations for the sharp rise in demand were brought to the Panel's 
attention during Panel staff discussions with FSA economists.
---------------------------------------------------------------------------
    In the end, credit availability from FSA is in some senses 
both the most predictable and least predictable of the major 
sources. It is highly predictable for three reasons: it cannot 
withdraw from the market nor can it shift resources to another 
industry without violating its mandate. Strong political 
support for agriculture makes it unlikely that its credit 
funding would ever drastically decline, outside of a 
fundamental reorganization of farm support programs. Finally, 
as the governmental lender of last resort, underwriting 
standards are much less volatile and susceptible to changes in 
market conditions. Increased credit availability, however, only 
results from congressional action or an intra-agency 
discretionary funding transfer, always a difficult process to 
predict.\207\ Borrowers could end up waiting in an application 
queue if the level of funding does not equal demand.
---------------------------------------------------------------------------
    \207\ See 7 U.S.C. Sec. 1988 for the relevant statutory language on 
the appropriations process for FSA's loan programs.
---------------------------------------------------------------------------

b. Farm Credit System

    FCS funding availability over the near-term is likely to 
contract, but individual FCS institutions may be able to 
maintain pre-crisis credit availability.\208\ Despite modest 
improvements in the availability of funding through the debt 
markets, spreads relative to Treasuries remain double their 
levels before the financial crisis and it remains extremely 
difficult to issue long-term debt.\209\ When combined with 
greater regulatory scrutiny, tighter underwriting standards, 
and increased delinquency on existing loans, this suggests 
credit availability will remain tighter than the norm of the 
past few years. FCS notes in its first quarter 2009 statement, 
``System managements have made a decision to slow loan 
growth.'' \210\ Furthermore, FCS's regulator, FCA, testified 
that ``lenders are naturally becoming more cautious and 
conservative on the extension of credit to farmers, ranchers, 
and other agricultural producers.'' \211\ More definitive data 
will provide clarity on the availability of credit from FCS.
---------------------------------------------------------------------------
    \208\ Mike Flesher COP Hearing Testimony, supra note 192, at 3; Bob 
Frazee House Agriculture Testimony, supra note 132, at 3.
    \209\ Leland Strom House Agriculture Testimony, supra note 186, at 
4.
    \210\ FCS First Quarter 2009 Statement, supra note 192, at 15.
    \211\ Leland Strom House Agriculture Testimony, supra note 186, at 
2.
---------------------------------------------------------------------------
    FCS's charter restricts its lending activities to 
agriculture-related activities. Thus, there is little chance of 
its members shifting their lending allocations to other 
industries. In fact, at the end of the first quarter of 2009, 
gross loan volume was $1 billion higher than it was on March 
31, 2008.\212\ With a mandatory borrowers' rights scheme 
already in place, but never tested during a significant general 
financial downturn, it is unclear whether a surge in 
modification requests would cause FCS members to further 
restrict credit availability as a precaution. Finally, the 
Panel again notes the regional and commodity-specific nature of 
any agriculture sector survey. FCS member associations tend to 
be regionally focused. An FCS member whose portfolio tilts 
heavily toward a particularly hard-hit product or region (such 
as the dairy sector) may make different credit availability 
decisions as compared to the System as a whole.\213\
---------------------------------------------------------------------------
    \212\ FCS First Quarter 2009 Statement, supra note 192, at 15.
    \213\ FCS First Quarter 2009 Statement, supra note 192, at 10 
(``Most institutions have higher geographic, borrower and commodity 
concentrations than the System as a whole.'').
---------------------------------------------------------------------------

c. Insurance companies and captive finance suppliers

    Both insurance companies and captive finance suppliers 
represent a small, yet relatively stable portion of the overall 
farm credit market.\214\ Life insurers provide loans secured by 
the real estate of larger farmers.\215\ As such, some experts 
see signs that insurers are scaling back lending in the face of 
reduced access to working capital on the part of their 
borrowers.\216\
---------------------------------------------------------------------------
    \214\ See sections 2.c and 2.d, supra for background on these 
market players.
    \215\ See, e.g., Prudential Agricultural Investments, Agricultural 
Lending (accessed July 14, 2009) (online at www3.prudential.com/
businesscenter/realestate/pmcc/whoweare/agricultural.html). 
Prudential's minimum loan size is $500,000.
    \216\ Paul Ellinger, Financial Crisis's Impact on Producer's and 
Agriculture's Long-term Forecast Presentation to the Independent 
Community Bankers of America, at 43 (2009) (hereinafter ``Paul Ellinger 
ICBA Presentation'').
---------------------------------------------------------------------------
    Likewise, the captive finance supplier lending market will 
continue to face challenges from an only slightly thawed asset-
backed finance market and a still limited commercial paper 
market. Furthermore, input suppliers such as seed and 
fertilizer companies must deal with the diminished cash flows 
of farmers involved in certain commodity sectors.\217\ Those 
smaller dealers and suppliers extending unsecured lines of 
credit face the possibility of non-recovery in the event of 
farm failures.\218\ Larger input suppliers may be impacted by 
the recent problems in the commercial paper market as well. 
John Deere reports lower revenue from financing and operating 
loans extended.\219\ Monsanto, the largest U.S.-based seed 
company, noted in its third quarter financial statement that it 
was ending its customer lending operation that had been 
conducted through a securitization vehicle of its 
creation.\220\
---------------------------------------------------------------------------
    \217\ Id.
    \218\ See Agricultural Retailers Association, Customer Financing 
Survey Results (May 4, 2004). According to the survey, most wholesalers 
and dealers do not have insurance covering their unsecured lending. One 
way they combat this risk is through the farmer's assignment of a 
payment, such as USDA subsidy payment, to the supplier.
    \219\ See Deere & Company, Deere Announces Second-Quarter Earnings 
(May 20, 2009) (online at www.deere.com/en_US/ir/media/pdf/
financialdata/reports/2009/2009_secondquarter.pdf). John Deere Credit 
Corporation, the Deere lending arm, also saw lower profits last year as 
its charge-off rate rose and interest rates declined.
    \220\ See Monsanto Company, Form 10-Q for the period ending May 31, 
2009, at 36 (June 26, 2009) (online at www.monsanto.com/investors /
financial_reports/sec_html.asp?ipage=6394612&repo=tenk).
---------------------------------------------------------------------------
    On the other hand, healthy equipment and input companies, 
perhaps strengthened by other corporate units or the vitality 
of certain agriculture sectors and regions, may look to fill 
any gaps in credit availability left by other market players, 
such as commercial banks. For example, witnesses at the Panel's 
field hearing in Greeley, CO, indicated that some input 
suppliers in their region may have increased their credit 
offerings in recent months, perhaps in an effort to ``pick up 
the slack'' from other lenders.\221\ John Deere has publicly 
expressed an interest in continuing to grow its loan portfolio, 
and its volume of operating loans to customers (many of whom 
are farmers) increased 58 percent from 2007 to 2008.\222\ Data 
from the Equipment Leasing and Financing Association show that 
credit approvals for the three agriculture equipment financing 
companies in its economic index dropped sharply from 95 percent 
in November 2008 to just over 70 percent in January 2009 but 
have since recovered to 85 percent in May 2009.\223\ This 
percentage is roughly 20 percentage points higher than the 
overall credit approval figure for all companies in the 
index.\224\
---------------------------------------------------------------------------
    \221\ Congressional Oversight Panel, Testimony of Marc Arnusch, 
Owner, Marc Arnusch Farms, COP Field Hearing in Greeley, CO, on Farm 
Credit (July 7, 2009) (audio available online at cop.senate.gov/
hearings/library/hearing-070709-farmcredit.cfm).
    \222\ See Deere & Company, Annual Report 2008, at 16 (Dec. 18, 
2008) (online at www.deere.com/en_US/ir/media /pdf/financialdata/
reports/2009/2008annualreport.pdf).
    \223\ This data was provided by Bill Choi, Director for Information 
and Research Services, Equipment Leasing and Finance Association. Choi 
disaggregated the index data cited in note 218, infra.
    \224\ Equipment Leasing and Finance Association, MLFI-25 and Beige 
Book Review First Quarter 09, at 14 (April 2009).
---------------------------------------------------------------------------

d. Commercial banks

    Commercial bank credit availability will continue to be 
driven by both agricultural producer demand for loan products 
and credit availability from lenders on the supply side. 
However, the extraordinary economic events of the past year and 
the extensive government response to those events means that 
events external to the agriculture industry will also cause 
disruptions. In its June report, the Panel noted the impact 
that continued stresses on bank capital could have on overall 
credit availability, which would include availability in the 
agriculture sector.

          According to the bank supervisors, and in some cases 
        only after very large infusions of capital by the U.S. 
        taxpayer, most U.S. banks now have capital levels in 
        excess of the amounts required under banking rules. 
        Nonetheless, the realized and prospective losses 
        created by the financial crisis and the impact of the 
        country's economic condition on banks' revenues have 
        substantially reduced, and are expected to further 
        reduce, the capital of some major banks. Falling 
        capital levels at major banks can lead to a broad loss 
        of confidence in bank solvency, particularly if there 
        is a lack of clear information as to the financial 
        condition of the major banks. Loss of confidence can 
        become a self-fulfilling prophecy, leading to the 
        reluctance of banks to lend to one another (a key 
        component of the banking system's operation), causing 
        individual banks to tighten credit by cutting back on 
        lending in general, and forcing regulators to pump 
        funds into one bank or BHC after another on an ad hoc 
        basis.\225\
---------------------------------------------------------------------------
    \225\ Congressional Oversight Panel, June Oversight Report: Stress 
Testing and Shoring Up Bank Capital (June 9, 2009) (online at 
cop.senate.gov/documents/cop-060909-report.pdf).

    i. Demand. Buoyed by appreciating land values and record 
product prices, farm credit at commercial farm banks \226\ 
increased to $55.1 billion in 2008.\227\ Demand for farm credit 
remains relatively strong, the likely result of farmers using 
credit as a means to ride out the recent volatility in certain 
sectors and the general economic crisis. In five Federal 
Reserve District first quarter agricultural lending surveys, 
approximately 70 percent of banks reported either the same or 
higher demand for farm operating loans as compared to a year 
earlier.\228\ However, in one District (Richmond) 48 percent of 
its bank respondents said demand for such loans was lower 
compared to a year ago.\229\ FDIC aggregated call report data 
indicate a four percent rise in farm loans from the first 
quarter of 2008 to the first quarter of 2009.\230\ The Chicago, 
Richmond, and Dallas District surveys show 80 percent, 60 
percent, and 61 percent of banks expecting the same or higher 
volume of real estate loans in the next quarter as compared to 
a year earlier.\231\ On the other hand, many farmers used the 
strong earnings and farmland values of the past few years to 
instead decrease their reliance on debt. This trend is 
especially noticeable among small farmers, while larger farmers 
remain relatively more reliant on debt to finance their 
operations.\232\
---------------------------------------------------------------------------
    \226\ As defined by the American Bankers Association, a farm bank 
has assets of less than $1 billion whose ratio of domestic farm loans 
to total domestic loans is greater than or equal to 14.20 percent. 
There are also 21 banks with more than $1 billion in assets which meet 
the farm loans to total loans ratio requirement.
    \227\ American Bankers Association. 2008 Farm Bank Performance, at 
3.
    \228\ Second Quarter Fed Databook, supra note 2, C.1 Non-real-
estate Farm Lending Compared with a Year Earlier.
    \229\ Second Quarter Fed Databook, supra note 2, C.1 Non-real-
estate Farm Lending Compared with a Year Earlier.
    \230\ Federal Deposit Insurance Corporation, Quarterly Banking 
Profile All Institutions Performance First Quarter 2009, Table 11-A 
(accessed July 7, 2009) (online at www2.fdic.gov/qbp/2009mar/
qbpall.html).
    \231\ Second Quarter Fed Databook, supra note 2, Table C.6. The 
most recent data available compiles the results of the first quarter 
2009 survey, asking about expectations regarding the second quarter of 
2009.
    \232\ USDA Finance Outlook, supra note 5, at 49.
---------------------------------------------------------------------------
    ii. Availability. On the supply side, in all six Federal 
Reserve Districts conducting agriculture surveys at least 70 
percent of banks responding had the same funds available for 
farm lending as they did a year earlier.\233\ Nevertheless, two 
prominent agricultural credit experts expect the gloomy 
economic picture to likely dampen farm credit availability: 
``Even if loan demand rebounds, tighter credit standards and 
increased collateral requirements could limit loan 
originations.'' \234\ Some data seem to bear out this gloomier 
assessment. Four districts reported a rise in the percentage of 
banks referring loan applicants to non-bank agencies (for 
example, FSA) as compared to a year earlier.\235\ The verdict 
is still out as to whether tighter underwriting standards and 
deteriorating farmer financial conditions will make credit 
harder to come by in the next few years.
---------------------------------------------------------------------------
    \233\ Second Quarter Fed Databook, supra note 2, Table C.1 Non-
real-estate Farm Lending Compared with a Year Earlier.
    \234\ Jason Henderson and Maria Akers, Recession Catches Rural 
America, Federal Reserve of Kansas City Economic Review, at 80 (First 
Quarter 2009) (online at www.kc.frb.org/PUBLICAT/ECONREV/PDF/
09q1Henderson.pdf).
    \235\ Second Quarter Fed Databook, supra note 2, Table C.3 
Indicators of Relative Credit Availability.
---------------------------------------------------------------------------
    iii. Other Factors. While the overall farm credit market 
offers mixed signals, certain locales have clearly seen 
declines. New Frontier Bank's April 2009 failure left farmers 
searching for new lenders to pick up the bank's $700 million 
agriculture portfolio, the eighth largest in the nation. As the 
dust continues to settle, credit in the area remains lacking 
relative to this demand.\236\ However, reports of possibly lax 
lending standards raise questions as to whether analogous 
localized credit contractions would result if other farm banks 
become insolvent.\237\ Nonetheless, the situation provides an 
example of the pressures that can occur in a locality when 
credit supply and demand become significantly imbalanced 
through any number of reasons, such as a bank failure, a major 
lender shifting its portfolio from agriculture, a natural 
disaster, or other reasons.
---------------------------------------------------------------------------
    \236\ It is unclear whether a lack of new entrants into the 
northeastern Colorado farm credit market is due to borrowers with weak 
balance sheets or the capacity of commercial lenders. See Congressional 
Oversight Panel, Transcript of COP Field Hearing in Greeley, CO on Farm 
Credit, at 71-73 (July 7, 2009); See also Larry Dreiling, Bank Failure 
Fallout is Topic of Vilsack Stop, High Plains/Midwest Ag Journal (May 
25, 2009) (online at www.hpj.com/archives/2009/may09/may25/
Bankfailurefalloutistopicof.cfm).
    \237\ Stephanie Simon, Town's Friendly Bank Left Nasty Mess, Wall 
Street Journal (June 16, 2009) (online at online.wsj.com/article/
SB124510107619616409.html).
---------------------------------------------------------------------------

                       D. Farm Loan Restructuring


       1. STATISTICS AND TRENDS IN DELINQUENCIES AND FORECLOSURES

    Any analysis of statistics and trends in farm loan 
delinquencies and foreclosures is necessarily limited by the 
lack of hard data available on farm loan foreclosures. The 
Panel noted a similarly frustrating lack of adequate 
delinquency, foreclosure, and restructuring data in its March 
report on residential mortgage foreclosure mitigation.\238\
---------------------------------------------------------------------------
    \238\ ``In every area of policy, Congress and the Administration 
need quality information in order to make informed decisions. . . . The 
first step for understanding the foreclosure crisis and evaluating 
responses is to have an accurate empirical picture of the mortgage 
market. For example, how many loans are not performing, what loss 
mitigation efforts have lenders undertaken, how many foreclosures have 
occurred, how many are in the process of occurring, and how many more 
are likely to occur? How many of these foreclosures are preventable, 
meaning that another loss mitigation option would result in a smaller 
loss to the lender? What is driving mortgage loan defaults? Are there 
any salient characteristics of the loans that are defaulting and for 
which successful modifications are not feasible? What relationship does 
foreclosure have to loan type, to loan-to-value ratios, to geographic 
factors, and to borrower characteristics? And crucially, what obstacles 
stand in the way of loss mitigation efforts? These are some of the 
questions for which the Congressional Oversight Panel believes the 
Congress and the Administration need to know the answers in order to 
make informed policy decisions.
    ``Unfortunately, this essential information is lacking. The failure 
of banks and housing regulatory agencies to gather and analyze quality 
market intelligence is striking. The United States is now two years 
into a foreclosure crisis that has brought economic collapse, and 
federal banking and housing regulators still know surprisingly little 
about the number of foreclosures, what is driving the foreclosures, and 
the efficacy of mitigation efforts.'' Congressional Oversight Panel, 
Foreclosure Crisis: Working Toward a Solution: March Oversight Report, 
at 11 (Mar. 6, 2009) (online at cop.senate.gov/documents/cop-030609- 
report.pdf).
---------------------------------------------------------------------------
    With the exception of FSA--which tracks foreclosure rates 
for its direct loan programs there is no existing source that 
tracks foreclosures on farm loans held by commercial banks or 
FCS institutions. However, a review of data that are 
available--such as data on farm loan delinquencies, nonaccrual 
loans, and loan charge-offs, for the various sources of farm 
credit--provides a reasonably good picture of the current 
performance of loans made to American farmers.
    On the whole, observable trends in the performance of farm 
loans mirror trends in agriculture markets generally, which 
have seen modest stress in recent quarters on the heels of 
several historically strong years. Similarly, delinquency, 
nonaccrual, and loan charge-off rates began to tick upward 
starting in the fourth quarter of 2008 and continuing in the 
first quarter of 2009; however, these upticks are from 
historically low rates--and they remain well below the rates 
seen during previous times of stress in the agriculture sector. 
Notwithstanding this caveat, the first quarter of 2009 did see 
some measures of credit quality rise to levels of stress not 
seen in the better part of a decade, and it remains to be seen 
whether these levels will continue to escalate to match the 
crisis conditions in other sectors of the economy or whether 
they will plateau at levels that, while above the excellent 
levels seen the past few years, are more in-line with 
historical agricultural loan performance.

a. The Farm Service Agency

    As the lender-of-last-resort for the American agriculture 
sector--exclusively serving borrowers who are unable to obtain 
credit at reasonable rates from other sources of farm credit--
it would stand to reason that signs of stress among farm 
borrowers would first begin to appear within the loan portfolio 
of FSA. However, fiscal year 2008 was a historically strong 
year for FSA loan performance, with loan loss rates in FSA's 
direct and guaranteed loan programs falling to their lowest 
levels since FSA began to track the data in 1985--1.7 percent 
for the direct loan program and 0.3 percent for the guaranteed 
loan program.\239\
---------------------------------------------------------------------------
    \239\ FSA June Testimony, supra note 41.
---------------------------------------------------------------------------

        Figure 22: FSA Direct Loan Losses: FY 1998-FY 2008 \240\

---------------------------------------------------------------------------
    \240\ FSA June Testimony, supra note 41.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
      Figure 23: FSA Guaranteed Loan Losses: FY 1998-FY 2008 \241\

---------------------------------------------------------------------------
    \241\ FSA June Testimony, supra note 41. 

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    

    Likewise, FSA loan delinquency rates indicated continued 
strength in the farm sector. The direct loan delinquency rate 
of 6.5 percent was the lowest rate on record and the guaranteed 
loan delinquency rate of 1.18 percent was the lowest rate since 
1995.\242\
---------------------------------------------------------------------------
    \242\ FSA June Testimony, supra note 41.
---------------------------------------------------------------------------

     Figure 24: FSA Direct Loan Delinquency: FY 1998-FY 2008 \243\

---------------------------------------------------------------------------
    \243\ FSA June Testimony, supra note 41. 

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
   Figure 25: FSA Guaranteed Loan Delinquency: FY 1998-FY 2008 \244\

---------------------------------------------------------------------------
    \244\ FSA June Testimony, supra note 41. 

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Foreclosure rates for FSA's direct loan program were also 
``very low'' in fiscal year 2008, as FSA participated in 169 
foreclosures, down from 311 foreclosures five years 
ealier.\245\ However, then-FSA Administrator Doug Caruso 
testified that he expects farm loan performance to 
``deteriorate somewhat'' this year ``given the increased 
financial stress in the agriculture economy.'' \246\ USDA 
testimony provided at the Panel's field hearing in Greeley, CO, 
described such deterioration as ``almost inevitable'' given the 
challenging economic times, increased stress in the dairy, hog, 
and poultry industries, and the fact that delinquencies and 
losses have been at all-time lows in recent years.\247\
---------------------------------------------------------------------------
    \245\ FSA June Testimony, supra note 41.
    \246\ FSA June Testimony, supra note 41.
    \247\ Scuse Testimony, supra note 64.
---------------------------------------------------------------------------
    FSA tracks the number of its guaranteed loans that are 
restructured by the lender. Thus far in the Fiscal Year ending 
September 30, 2009, 736 loans totaling $139 million have been 
restructured. At this pace, total restructurings have already 
nearly eclipsed last year's final numbers (853 restructurings 
totaling $141 million) and may exceed the highest volume seen 
since Fiscal Year 2003 (853 restructurings in 2007).\248\ 
However, FSA's guaranteed loan portfolio increased from 53,000 
to 65,000 loans during this time period. Thus, while the number 
of restructurings rose this year as the farm economy weakened, 
this number saw an uptick as early as 2006 while still 
remaining a small percentage of total loans. FSA does not track 
the type of lender, such as a commercial bank or FCS 
institution, involved in the restructuring.
---------------------------------------------------------------------------
    \248\ FSA loan servicing officials provided the Panel with data on 
restructurings through a data request to their internal loan tracking 
system.
---------------------------------------------------------------------------

b. The Farm Credit System

    The quality of loans held by FCS institutions began to 
deteriorate a bit in the fourth quarter of 2008; however, this 
uptick in nonperforming loans was from historically low levels. 
Nonaccrual loans as a percentage of gross loan volume reached 
1.41 percent as of December 31, 2008, up from 0.36 percent one 
year earlier and 0.43, 0.49, and 0.67 percent at the close of 
2006, 2005, and 2004, respectively.\249\ Overall, nonperforming 
loans as a percentage of gross loan volume followed a similar 
trend, hitting 1.50 percent at the close of 2008, up from 0.43, 
0.50, 0.56, and 0.77 percent in the four preceding years.\250\ 
Nonaccrual and nonperforming loans have edged up further in 
2009, hitting 1.70 percent and 1.80 percent, respectively, as 
of March 31, 2009.\251\
---------------------------------------------------------------------------
    \249\ Farm Credit Administration, FCS Major Financial Indicators 
(June 16, 2009) (online at www.fca.gov/reports/fcsindicators.html) 
(hereinafter ``FCS First Quarter 2009 Indicators'').
    \250\ Id.
    \251\ Id.
---------------------------------------------------------------------------
    While FCS reports that ``the current level of 
[nonperforming] loans has moved more in line with historical 
levels,'' following an extraordinarily strong couple of years, 
the fact is that these nonaccrual and nonperforming loan rates 
are the highest such rates seen this decade, and thus should be 
carefully monitored moving forward.\252\ However, these rates 
would have to increase dramatically to come close to rivaling 
rates seen during previous periods of stress in the farm 
sector. For a point of reference, nonperforming loans as a 
percentage of gross loan volume exceeded ten percent in 1989, 
at the tail end of the 1980s farm crisis.\253\ The chart below 
tracks the percentage of nonperforming FCS loans over the past 
two decades.
---------------------------------------------------------------------------
    \252\ FCS 2008 Annual Information Statement, supra note 134, at 9.
    \253\ July FCS Investor Presentation, supra note 131.
---------------------------------------------------------------------------

 Figure 26: FCS Nonperforming Loans to Total Loans: 1989-First Quarter 
                               2009 \254\

---------------------------------------------------------------------------
    \254\ July FCS Investor Presentation, supra note 131. 

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
c. Commercial banks

    Trends in delinquencies and nonperforming loans at 
commercial banks likewise reveal a modest uptick beginning in 
the fourth quarter of 2008, and a continued upswing in the 
first quarter of 2009, following a number of years of 
extraordinarily high farm credit quality. The share of total 
farm real estate loans delinquent at the close of the first 
quarter of 2009 hit 2.76 percent, up from 1.66 percent one year 
earlier, with loans past due 30-89 days up from 0.87 to 1.26 
percent, loans past-due over 90 days yet still accruing 
interest up from 0.21 to 0.23 percent, and nonaccruing loans 
rising from 0.58 percent to 1.26 percent.\255\
---------------------------------------------------------------------------
    \255\ Second Quarter Fed Databook, supra note 2, at 24 (B.4 
Delinquent Real Estate Farm Loans Held by Insured Commercial Banks).
---------------------------------------------------------------------------

  Figure 27: Farm Real Estate Loan Delinquencies at Commercial Banks 
                                 \256\

---------------------------------------------------------------------------
    \256\ Second Quarter Fed Databook, supra note 2, at 24 (B.4 
Delinquent Real Estate Farm Loans Held by Insured Commercial Banks). 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The net share of farm real estate loans charged off rose 
from 0.008 percent in the first quarter of 2008 to 0.051 in the 
first quarter of 2009.\257\ While all of these figures remain 
at or below typical levels seen in the 1990s and even earlier 
this decade, the jumps seen over the past two quarters may be 
reason for concern should delinquencies continue to rise at 
this rate in future quarters.
---------------------------------------------------------------------------
    \257\ Second Quarter Fed Databook, supra note 2, at 25 (B.5 Net 
Charge-Offs of Real Estate Farm Loans Held by Insured Commercial 
Banks).
---------------------------------------------------------------------------

  Figure 28: Net Charge-offs of Farm Real Estate Loans at Commercial 
                              Banks \258\

---------------------------------------------------------------------------
    \258\ Second Quarter Fed Databook, supra note 2, at 22 (B.2 
Delinquent Non-Real Estate Farm Loans Held by Insured Commercial 
Banks). 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The performance of non-real estate farm loans followed a 
similar trend, with the total share of delinquent non-real 
estate farm loans rising from 1.72 percent in the first quarter 
of 2008 to 2.53 percent in the first quarter of 2009.\259\ From 
year-to-year, the share of non-real estate farm loans past-due 
30-89 days rose from 0.98 percent to 1.36 percent, loans past-
due over 90 days yet still accruing interest went up from 0.22 
to 0.32 percent, and nonaccruing loans rose from 0.52 percent 
to 0.85 percent.\260\
---------------------------------------------------------------------------
    \259\ Second Quarter Fed Databook, supra note 2, at 22 (B.2 
Delinquent Non-Real Estate Farm Loans Held by Insured Commercial 
Banks).
    \260\ Second Quarter Fed Databook, supra note 2, at 22 (B.2 
Delinquent Non-Real Estate Farm Loans Held by Insured Commercial 
Banks).
---------------------------------------------------------------------------

Figure 29: Farm Non-Real Estate Loan Delinquencies at Commercial Banks 
                                 \261\

---------------------------------------------------------------------------
    \261\ Second Quarter Fed Databook, supra note 2, at 22 (B.2 
Delinquent Non-Real Estate Farm Loans Held by Insured Commercial 
Banks). 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Net charge-offs of non-real estate farm loans increased 
from 0.02 percent to 0.11 percent from the first quarter of 
2008 to the first quarter of 2009.\262\ Again, while these 
numbers are up from the historically low levels seen in recent 
years, they are below loan delinquency rates from earlier this 
decade, and well below delinquency and charge-off rates from 
the 1980s.
---------------------------------------------------------------------------
    \262\ Second Quarter Fed Databook, supra note 2, at 23 (B.3 Net 
Charge-Offs of Non-Real Estate Farm Loans Held by Insured Commercial 
Banks).
---------------------------------------------------------------------------

Figure 30: Net Charge-offs of Farm Non-Real Estate Loans at Commercial 
                              Banks \263\

---------------------------------------------------------------------------
    \263\ Second Quarter Fed Databook, supra note 2, at 23 (B.3 Net 
Charge-Offs of Non-Real Estate Farm Loans Held by Insured Commercial 
Banks). 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Additional Federal Reserve data that capture a somewhat 
different universe of loans to finance agricultural production 
show the same uptick in charge-offs and delinquencies.\264\ 
Specifically, the delinquency rate on agricultural production 
loans rose from 1.06 percent (seasonally adjusted) in the first 
quarter of 2008 to 1.71 percent (seasonally adjusted) in the 
first quarter of 2009, with the delinquency rate at the 100 
largest banks in the United States (by assets) rising from 1.14 
percent to 2.52 percent and the delinquency rate at the 
remainder of commercial banks going from 1.01 percent to 1.38 
percent over that time period.\265\
---------------------------------------------------------------------------
    \264\ Data on charge-offs and delinquencies on agricultural loans 
are compiled in two quarterly Federal Reserve statistical releases, the 
E.15 Agricultural Finance Databook (discussed throughout this report) 
and the Charge-Off and Delinquency Rates on Loans and Leases at 
Commercial Banks release. The two releases differ somewhat in their 
methodology and the universe of agricultural loans that they include. 
While the E.15 Databook includes delinquency and charge-off rates for 
both agricultural production and farm real estate loans, the Charge-
Offs and Delinquencies release only includes a figure for agricultural 
production loans. The E.15 Databook also manipulates the data to 
provide an estimate for delinquency and charge-off rates on non-real 
estate farm loans at banks with under $300 million in assets at which 
farm production loans account for fewer than five percent of total 
loans and leases (these small banks not concentrated in agriculture are 
not required to report this data on their call reports). The E.15 also 
adjusts the data to exclude foreign results for large banks that report 
farm delinquencies and charge-offs on a consolidated basis. For its 
part, the Charge-Offs and Delinquencies release seasonally adjusts its 
data, and it provides an annualized figure for charge-offs (thus 
accounting for the higher charge-off rates in the Charge-Offs and 
Delinquencies release compared to the E.15 Databook.)
    \265\ Board of Governors of the Federal Reserve System, Charge-Off 
and Delinquency Rates on Loans and Leases at Commercial Banks (First 
Quarter 2009) (online at www.federalreserve.gov/releases/chargeoff/
default.htm) (hereinafter ``Fed Charge-Off and Delinquency Rates'').
---------------------------------------------------------------------------

Figure 31: Delinquency Rate on Loans to Finance Agricultural Production 
                                 \266\

---------------------------------------------------------------------------
    \266\ Id.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Annualized charge-off rates on agriculture production loans 
likewise went up from the first quarter of 2008 to the first 
quarter of 2009, going from 0.08 percent to 0.42 percent 
overall (seasonally adjusted)--0.04 percent to 0.47 percent at 
the largest 100 banks and 0.11 percent to 0.45 percent at the 
remainder of commercial banks.\267\ Tracking these data from 
the height of the 1980s farm crisis--when delinquency rates 
topped nine percent and charge-off rates exceeded four 
percent--puts this current upswing into perspective.
---------------------------------------------------------------------------
    \267\ Id.
---------------------------------------------------------------------------

Figure 32: Charge-off Rate on Loans to Finance Agricultural Production 
                                 \268\

---------------------------------------------------------------------------
    \268\ Id.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    

    A look at the distribution of agriculture banks--defined by 
the Federal Reserve as those that have a proportion of farm 
loans (real estate plus non-real estate) to total loans that is 
greater than the unweighted average at all banks--according to 
the proportion of their loans that are nonperforming provides 
an alternative measure of the performance of farm loans. The 
share of agriculture banks with more than five percent of their 
loans nonperforming increased from 3.4 percent in the first 
quarter of 2008 to 6.6 percent in the first quarter of 
2009.\269\ This proportion was 31.5 percent during the first 
quarter of 1987.\270\
---------------------------------------------------------------------------
    \269\ Second Quarter Fed Databook, supra note 2, at 26 (B.6 
Distribution of Agricultural Banks by the Share of Their Total Loans 
that are Nonperforming).
    \270\ Second Quarter Fed Databook, supra note 2, at 26 (B.6 
Distribution of Agricultural Banks by the Share of Their Total Loans 
that are Nonperforming).
---------------------------------------------------------------------------
    However, the proportion of agricultural banks in the next 
tier down those with 2.0 and 4.9 percent of total loans 
nonperforming rose from 15.5 percent to 23.6 percent between 
the first quarters of 2008 and 2009, while the proportion of 
agriculture banks with fewer than 2.0 percent of total loans 
nonperforming fell from 81.0 percent to 69.9 percent over that 
time period.\271\ This proportion of banks with under 2.0 
percent of loans nonperforming is at its lowest level since 
1992, though it should be emphasized that these proportions are 
based on the performance of all loans and leases--not merely 
agricultural loans.
---------------------------------------------------------------------------
    \271\ Second Quarter Fed Databook, supra note 2, at 26 (B.6 
Distribution of Agricultural Banks by the Share of Their Total Loans 
that are Nonperforming).
---------------------------------------------------------------------------

   Figure 33: Agriculture Banks with Nonperforming Loans Exceeding 5 
                             Percent \272\

---------------------------------------------------------------------------
    \272\ Second Quarter Fed Databook, supra note 2, at 26 (B.6 
Distribution of Agricultural Banks by the Share of Their Total Loans 
that are Nonperforming). 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Also useful to consider when attempting to track the 
performance of farm loans is the amount of farmland held by 
commercial banks--a rough gauge of foreclosure activity. The 
value of farmland in bank possession more than doubled between 
the first quarter of 2008 and the first quarter of 2009 going 
from $60.7 million to $122.4 million.\273\ While this figure is 
well below the value of farmland held in the early 1990s, in 
the aftermath of the farm crisis (farmland in bank possession 
exceeded $424 million in 1992), this jump does provide reason 
for concern, and a continued upswing could be an indication of 
more difficult times than anticipated for the farm sector.\274\
---------------------------------------------------------------------------
    \273\ FDIC First Quarter Call Report Data, supra note 149.
    \274\ FDIC First Quarter Call Report Data, supra note 149.
---------------------------------------------------------------------------

           Figure 34: Farmland Held by Commercial Banks \275\

---------------------------------------------------------------------------
    \275\ FDIC First Quarter Call Report Data, supra note 149.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Finally, the Federal Reserve's survey of farm lenders 
provides information on repayment rates for farm loans. Recent 
surveys conducted in the Federal Reserve's Kansas City, Dallas, 
and Minneapolis regions indicate that between five and 20 
percent more bankers have found farm loan repayment rates to 
have decreased in the first quarter of 2009 compared to the 
first quarter of 2008 than have found that rate to have 
increased over that time period.\276\ As with other indicators, 
this rate should be tracked moving forward, as continued spikes 
in loan nonpayment would likely give rise to increased rates of 
farm foreclosures.
---------------------------------------------------------------------------
    \276\ Second Quarter Fed Databook, supra note 2, at 31 (C.1 Non-
Real Estate Farm Lending Compared with a Year Earlier).
---------------------------------------------------------------------------

    2. LOAN RESTRUCTURING POLICIES IN PLACE AT MAJOR CREDIT SOURCES

a. Farm Service Agency

    i. FSA Direct Loans. The Agricultural Credit Act of 1987 
instituted a number of reforms to USDA's Farm Loan Programs 
(FLP) that aimed to enhance several core principles of FSA, 
including timely and comprehensive disclosure of loan programs 
and loan status; preservation of operating farms whenever 
feasible; uniform criteria for credit decisions; and fair and 
equitable treatment by FSA. These principles are reflected in 
specific mandates, such as required notice of loan servicing 
programs and a period to consider the options before the agency 
can accelerate a delinquent loan; a range of loan servicing 
tools; specific timeframes for the agency to respond to loan 
applications and loan servicing requests; and a duty on the 
agency's part to provide assistance to any farmer who seeks to 
make a loan application or servicing request.\277\
---------------------------------------------------------------------------
    \277\ Jerome Stam, Steven Koenig, Susan Bentley, and H. Frederick 
Gale, Jr. Farm Financial Stress, Farm Exits, and Public Sector 
Assistance to the Farm Sector in the 1980s, USDA Economic Research 
Service (Agriculture Economic Report Number 645).
---------------------------------------------------------------------------
    FSA is required by law to attempt to restructure loans 
issued by its FLP when borrowers are unable to make scheduled 
payments due to reasons beyond their control.\278\ The law also 
provides a process by which FSA loans are to be serviced in 
order to avoid foreclosure and liquidation. FSA's 
responsibilities under the law are triggered when a borrower 
becomes 90 days past due on an FSA loan account. The agency 
must provide a servicing packet to the borrower presenting the 
available options for avoiding foreclosure on the loan. 
Borrowers who are not delinquent, but anticipate that they will 
not be able to make their next payment, may request the 
servicing packet at any time. Borrowers have 60 days from the 
receipt of the packet to respond to FSA and express their 
desire to pursue an alternative to foreclosure.\279\ The 
guiding principle in the exploration of foreclosure 
alternatives is to keep borrowers on their land and operating 
their farms under restructured loans whenever the government 
would receive an equal or greater net return than it would 
otherwise realize through foreclosure.
---------------------------------------------------------------------------
    \278\ 7 U.S.C. Sec. 2001.
    \279\ 17 C.F.R. Sec. 766.1 et seq. (2004).
---------------------------------------------------------------------------
    FSA determines the net recovery value of a given loan 
security retrieved through liquidation by adding (1) the 
current appraised value of the borrower's interest in the 
security property, and (2) the value of the borrower's 
interests in all other assets that are neither exempt from 
judgment nor essential for farm living or farm operating 
expenses, and then subtracting the government's costs of 
acquiring, holding, maintaining, and disposing of the property. 
These costs include prior liens on the property, taxes and 
assessments, depreciation, lost interest income, resale 
expenses (including necessary repairs), and other 
administrative and legal expenses. If FSA determines that the 
present value of payments that the borrower would make under a 
restructured loan would be of equal or greater value than the 
calculated net recovery value of the security for the original 
loan, under the law a loan modification must be offered. The 
appropriate restructuring option is calculated by the Debt and 
Loan Restructuring System (DALRS), an automated software 
program using inputs provided by the borrower. Each loan 
servicing alternative generated by DALRS is considered with the 
goal of developing a feasible plan that allows the borrower to 
meet necessary family living and farm operating expenses and 
service all debts, including restructured loans. A feasible 
plan must cover up to 110 percent of the borrower's projected 
expenses and debt service obligations.\280\
---------------------------------------------------------------------------
    \280\ U.S. Department of Agriculture, Direct Loan Servicing--
Special and Inventory Property Management, Farm Service Agency Handbook 
(Oct. 9, 2008) (online at www.fsa.usda.gov/Internet/FSA_File/2-
flp.pdf).
---------------------------------------------------------------------------
    FSA has four ``primary loan servicing'' options at its 
disposal under the restructuring program. The options include: 
\281\
---------------------------------------------------------------------------
    \281\ Loan Restructuring in the USDA Farm Loan Program, Farmers' 
Legal Action Group, Inc. Briefing Paper (hereinafter ``FLAG Loan 
Restructuring'').
---------------------------------------------------------------------------
            1. Consolidation, reamortization, and rescheduling
    General operating loans can be rescheduled for up to 15 
years from the date of their restructure. Principal and unpaid 
interest can be combined and rescheduled for up to 15 years. 
Line of credit loans can be rescheduled for up to seven years 
from the date of the restructure. Real estate loans may be 
reamortized over a period of up to 40 years from the date of 
the original loan.
            2. Deferral
    The deferral option allows the borrower to make no payments 
or only partial payments for up to five years. All of the 
principal and a portion of the interest may be deferred but a 
partial interest payment must always be received. To be 
eligible for a deferral, borrowers must obtain FSA approval of 
a feasible first-year deferral and post-deferral farm operating 
plan that does not create excessive net cash reserves.
            3. Interest rate reduction
    FSA may also complement the restructuring mechanisms in 
options one and two by reducing the interest rate on a loan.
            4. Writedown
    If consolidation, rescheduling, reamortization, deferral, 
or some combination thereof does not result in a feasible plan 
with 110 percent debt service margin, FSA may consider a 
writedown, a reduction in the total debt. This option is only 
available to borrowers who are currently delinquent on their 
loans and have not previously received debt forgiveness on any 
FSA direct loan. The size of the writedown is generally 
calculated to require the borrower to pay the most he or she 
can afford, including the value of any nonexempt, nonessential 
assets. The debt cannot be written down below the net recovery 
value of the loan collateral. Federal law limits debt 
forgiveness to one instance of no more than $300,000.\282\
---------------------------------------------------------------------------
    \282\ 7 U.S.C. Sec. 2001.
---------------------------------------------------------------------------
    In circumstances where a loan is restructured via 
writedown, FSA is required by law to enter into a Shared 
Appreciation Agreement (SAA) providing for the government to 
share any appreciation in value of the security property that 
occurs over a specified time period. SAAs are designed to 
protect taxpayers, ensuring that farmers who benefit from a 
government writedown and subsequently enjoy a reversal of 
fortune must repay at least a portion of the public assistance. 
SAAs issued after August 18, 2000, have a maximum term of five 
years and may be triggered by either a conveyance of the 
security property (other than to a spouse upon the borrower's 
death); full payment or other satisfaction of the underlying 
loan; cessation of farming by the borrower; or acceleration of 
the underlying loan. If none of these triggers occur during the 
life of the contract, recapture will be triggered upon 
expiration of the contract. The amount of appreciation that 
USDA is entitled to depends upon when the trigger event occurs. 
If the trigger event occurs in the first four years of the 
agreement, USDA will claim 75 percent of the increase in value 
of the security. If the trigger occurs in the fifth year, or at 
the expiration of the SAA, USDA may claim 50 percent of the 
increase in the value of the security. Under no circumstances 
may FSA recapture more than the amount of principal and 
interest that was written down.\283\
---------------------------------------------------------------------------
    \283\ FLAG Loan Restructuring, supra note 281.
---------------------------------------------------------------------------
    If DALRS indicates that no feasible plan is possible under 
any of the available restructuring options, state-sponsored 
mediation or a meeting of creditors may be offered. If 
restructuring is not possible after mediation, the borrower may 
have the opportunity to buy out the debt at the current market 
value of the security and any non-essential assets. The 
remainder of the debt is written off when the buyout is 
accomplished. If the borrower is unable to take advantage of 
the buyout option, FSA is required to proceed with foreclosure 
in an effort to recover as much value as possible. In certain 
situations, borrowers may avoid foreclosure by voluntarily 
conveying the security property to the government in full 
satisfaction of the debt.\284\
---------------------------------------------------------------------------
    \284\ U.S. Department of Agriculture, Fact Sheet: Primary and 
Preservation Loan Servicing for Delinquent FSA Borrowers (July 2008) 
(online at www.fsa.usda.gov/FSA/ newsReleases?area=home&subject= 
empl&topic=pfs&newstype= prfactsheet&type=detail&item= pf_20080710_ 
farln_en_ppls08.html) (hereinafter ``Delinquent FSA Borrower 
Factsheet'').
---------------------------------------------------------------------------
    An individual receiving notification of an adverse decision 
from USDA has the right to appeal. The USDA appeals process has 
two stages. The borrower must first participate in a hearing in 
his or her state or jurisdiction of residence with an FSA 
officer. Following this hearing, either the borrower or FSA may 
petition the National Appeals Division of the USDA (NAD) to 
reconsider the finding of the local hearing officer. The NAD 
Director then decides if the case will be heard and either 
finds the case to be not appealable or schedules a final 
hearing. The vast majority of these petitions are found to be 
appealable.\285\
---------------------------------------------------------------------------
    \285\ Of the 266 cases brought before the NAD Director in 2008, 242 
of those cases were found to be appealable. U.S. Department of 
Agriculture, National Appeals Division, FY 2008 NAD Appeal abilities 
(online at www.nad.usda.gov/Forms/
FY%202008%20NAD%20Appealabilities.pdf).
---------------------------------------------------------------------------
    ii. FSA Guaranteed Loans. While FSA guaranteed loans are 
made by private lenders and only guaranteed by the government, 
federal law requires that the Secretary of Agriculture ensure 
that the programs are designed to be responsive to the needs of 
borrowers and lenders, and that all viable options are explored 
before the lender initiates foreclosure proceedings.\286\ USDA 
regulations provide thorough instructions on the steps that 
lenders are expected to take to keep borrowers out of 
foreclosure via loan restructuring.\287\ However, ultimately it 
is solely the lender's prerogative to accept or reject a 
borrower's plan for resolution of a default or offer another 
alternative for restructuring debt. FSA credit officers play an 
advisory role, helping to maximize the outcome for all 
concerned stakeholders.\288\
---------------------------------------------------------------------------
    \286\ 7 U.S.C. Sec. 1998.
    \287\ 7 C.F.R. Sec. 762.101 et seq. (2007).
    \288\ U.S. Department of Agriculture, Guaranteed Loan Making and 
Servicing, Farm Service Agency Handbook (Oct. 9, 2008) (online at 
www.fsa.usda.gov/Internet/FSA_File/2-flp.pdf) (hereinafter ``FSA 
Guaranteed Loans Handbook'').
---------------------------------------------------------------------------
    A guaranteed loan is considered in default if a loan 
payment is outstanding 30 calendar days after its due date. 
Within 15 days of default, the lender should arrange a meeting 
with the borrower to identify the nature of the delinquency and 
develop a course of action that will resolve the issue and 
preclude the loan from going to foreclosure. An FSA credit 
officer may be brought into the process at the request of 
either the lender or the borrower to help facilitate a 
solution. Similar to direct loans, the restructuring options 
for guaranteed loans include rescheduling, reamortization, 
deferral, debt writedown, or some combination thereof. However, 
unlike the direct loan program, the burden of identifying the 
appropriate restructuring option lies with the borrower, not 
the lender. In addition, holders of distressed guaranteed 
operating loans may also be eligible for relief through FSA's 
Interest Assistance Program (IAP). Under IAP, FSA agrees to 
subsidize four percent of the interest rate in the form of a 
payment from FSA to the lender.\289\ If a borrower qualifies 
for IAP assistance, the lender may not initiate foreclosure 
action on the loan until 60 days after the date that 
eligibility is determined, affording the borrower time to 
present a viable restructuring plan with IAP as a 
component.\290\
---------------------------------------------------------------------------
    \289\ American Bankers Association, Industry Issues: USDA, Farm 
Service Agency Guaranteed Loan Servicing Options (June 30, 2009) 
(online at www.aba.com/Industry+Issues/GR_AG_FSAGuarLoan.htm) 
(hereinafter ``ABA Guaranteed Loans'').
    \290\ FSA Guaranteed Loans Handbook, supra note 288.
---------------------------------------------------------------------------
    Institutions that guarantee FSA loans are categorized 
according to their experience and performance in the program. 
Junior lenders, known as standard eligible lenders, must seek 
approval of restructuring plans, whereas the more senior 
certified and preferred lenders have greater leverage to 
restructure loans without FSA approval. Certain restrictions 
apply to all lenders. Loans secured by real estate and/or 
equipment may be restructured using a balloon payment, equal 
installments, or unequal installments, but the projected value 
of the security must indicate that the loan will be fully 
secured when the balloon payment is due. These loans must have 
a minimum term of five years. Loans secured solely by livestock 
or crops are not eligible for rescheduling using a balloon 
payment.\291\ All debt writedowns require prior approval from 
FSA. The present value of the loan to be written down, based on 
the interest rate of the rescheduled loan, must be equal to or 
exceed the net recovery value of the loan collateral. FSA will 
compensate the lender for the loss incurred as a result of the 
writedown in proportion to the guaranteed percentage of the 
loan.\292\ On loans secured by real estate, lenders must 
execute a shared appreciation agreement under the same terms as 
direct loans that are written down by FSA.
---------------------------------------------------------------------------
    \291\ FSA Guaranteed Loans Handbook, supra note 288.
    \292\ ABA Guaranteed Loans Handbook, supra note 289.
---------------------------------------------------------------------------
    Since USDA guaranteed loans are neither owned nor serviced 
by USDA, USDA maintains that its role is as a guarantor.\293\ 
The borrower and lender must jointly petition for an appeal. 
The only exception is when a lender is appealing the amount of 
a final loss payment from USDA, in which case only the lender 
may appeal. USDA does not allow appeals to lender decisions by 
borrowers.\294\
---------------------------------------------------------------------------
    \293\ In this way, USDA guarantees serve a purpose analogous to the 
role played by TARP in agriculture lending by TARP-recipient banks: 
both are federal backstops to commercial bank risk taking.
    \294\ 12 C.F.R. Sec. 762.104 (2007).
---------------------------------------------------------------------------

b. Farm Credit System

    The Agricultural Credit Act of 1987 required the FCS to 
implement mandatory protections for its customers, a set of 
provisions known as ``borrower rights.'' \295\ The provisions 
are designed to ensure that FCS lenders provide borrowers with 
full disclosure of their loan status and the opportunity to 
pursue a viable alternative to foreclosure. The borrower rights 
provisions are enumerated in the statute and are enforced by 
the FCA.\296\ In addition, each FCS lending institution is 
required to maintain a formal policy governing loan 
restructuring that is consistent with the law and approved by 
the FCA.\297\
---------------------------------------------------------------------------
    \295\ Agricultural Credit Act of 1987, Pub. L. No. 100-233.
    \296\ 12 U.S.C. Sec. 2202(a).
    \297\ 12 C.F.R. Sec. 616 (1999).
---------------------------------------------------------------------------
    Borrower rights entitle FCS customers to certain 
disclosures on all loans, whether the loan is distressed or 
not. These basic disclosure requirements on non-distressed 
loans include: \298\
---------------------------------------------------------------------------
    \298\ Farm Credit Administration, Borrower Rights (accessed July 
17, 2009) (online at www.fca.gov/about/borrower_rights.html).
---------------------------------------------------------------------------
           the current effective rate of interest on a 
        loan by the date it closes;
           any borrower requirement to purchase at-risk 
        stock in the FCS institution;
           copies of all the documents signed by the 
        borrower prior to closure of the loan;
           prompt notification of whether a loan 
        application has been accepted, reduced, or denied.
    With respect to distressed loans, FCS lenders are required 
to notify borrowers at least 45 days in advance of the 
initiation of a foreclosure proceeding that they may qualify 
for a restructuring. At that time, the borrower is entitled to 
an opportunity to review the status of the loan and respond to 
the institution with an acceptable plan for restructuring the 
loan. Restructuring may include rescheduling, reamortization, 
renewal, deferral of principal or interest, debt forgiveness, 
or any other action to modify a loan so as to make it probable 
that the borrower will recover and become financially viable. 
As in the case of FSA loans, if a restructuring alternative can 
be identified which is less than or equal to the estimated cost 
of foreclosure and liquidation, the lender is required to enter 
a restructuring agreement with the borrower.\299\ The key 
difference is that the burden of developing a feasible 
alternative on an FCS loan lies with the borrower, not the 
lender.
---------------------------------------------------------------------------
    \299\ 12 U.S.C. Sec. 2202(a).
---------------------------------------------------------------------------
    FCS institutions are required to consider several factors 
when evaluating the borrower's proposal and conducting a least-
cost analysis of restructuring versus foreclosure. The net 
recovery value of foreclosure must take into consideration the 
outstanding balance due on a loan and the liquidation value of 
the loan, including the borrower's repayment capacity and the 
liquidation value of the collateral. This includes estimates of 
maintaining a loan as a nonperforming asset or incurring the 
administrative and legal fees associated with foreclosing on 
the loan and disposing of the acquired property. The 
calculation of the cost of restructuring the loan must account 
for the present value of interest income and principal forgone 
by the lender in carrying out the restructuring plan; the 
reasonable and necessary administrative expenses involved in 
working with the borrower to finalize and implement the 
restructuring plan; whether the borrower has presented a 
preliminary restructuring plan and cash-flow analysis taking 
into account income from all sources to be applied to the debt 
and all assets to be pledged, showing a reasonable probability 
that orderly debt retirement will occur as a result of the 
proposed restructuring; and whether the borrower has furnished 
or is willing to furnish complete and current financial 
statements in a form acceptable to the institution.
    Ultimately, the decision of what is the least-cost 
alternative, and therefore of whether or not to restructure a 
loan, lies with the lending institution. Provided that it has 
done the proper due diligence and conducted a fair comparative 
assessment of the cost of a loan restructuring versus 
foreclosure, the institution may deny the application and 
pursue foreclosure. If restructuring is denied, an FCS borrower 
may request a review by a credit review committee (CRC). The 
board of directors of each FCS institution must establish a CRC 
to review an adverse credit decision and that CRC must include 
at least one of the institution's farmer-elected board members 
and exclude any loan officers involved in making the initial 
decision. The CRC has the ultimate decision-making authority on 
all credit decision reviews.\300\
---------------------------------------------------------------------------
    \300\ Delinquent FSA Borrower Factsheet, supra note 284.
---------------------------------------------------------------------------
    As the regulator of the FCS, FCA receives any complaints 
regarding loan restructuring applications. FCA also examines 
for compliance with borrower rights provisions as part of its 
regular examination process. If the FCA determines that an FCS 
institution has failed to properly comply with the borrower 
rights requirements, FCA may issue a directive instructing the 
institution to take corrective action. Failure to comply with 
the directive may result in FCA assessing monetary penalties or 
seeking a court order. Borrowers are afforded no private right 
of action under the borrower rights provisions. Borrower rights 
do not attach to loans that are sold into the secondary market.

c. Commercial banks

    i. Options for Restructuring. There is no across-the-board 
agricultural loan restructuring policy for commercial banks. 
Each institution, be it a smaller, community bank or a large, 
national lender, determines its modification policy based on 
its own risk tolerance, the borrower assets involved, and other 
considerations. At the moment, due to strong farmland values 
and historically low farm debt-to-asset ratios (as discussed 
infra) greater options may exist for flexible 
modifications.\301\
---------------------------------------------------------------------------
    \301\ See sections B(2) and B(3), supra, for a detailed discussion 
of farmland values and debt-to-asset ratios.
---------------------------------------------------------------------------
    The variability of commercial bank policies creates 
difficulties for data analysis of current farm loan 
restructuring activities. No statutorily mandated or industry-
adopted policies are in place. Due to the lack of 
standardization and reporting requirements, no data are 
available concerning the frequency or types of farm loan 
modifications conducted by commercial banks.
    While lacking any sort of enforcement mechanism, some 
regional associations representing larger institutions develop 
best practices to serve as a framework for making restructuring 
decisions, particularly when the region is dealing with 
problems in prominent local product sectors.\302\ For example, 
the Wisconsin Bankers Association has developed a set of 
principles of farm debt restructuring:
---------------------------------------------------------------------------
    \302\ See, e.g., Wisconsin Bankers Association, Principles of Farm 
Debt Restructuring, Letter from Kurt Bauer, President and Chief 
Executive Officer of the Wisconsin Bankers Association, to Senator 
Feingold (June 19, 2009).
---------------------------------------------------------------------------
           Customer success is the overriding 
        principle: bankers want to see their farm customers 
        thrive and will work with their customers during good 
        times and bad.
           Customer equity considerations: sometimes 
        the best option for a financially troubled borrower is 
        for them to preserve their equity by liquidating the 
        business. The decision to liquidate is not easy, but 
        many times is the best solution in a number of 
        situations. Bankers will work with their customers to 
        help them decide the best course of action
           Honesty: Customers must make a good faith 
        effort to abide by any existing loan agreements that 
        were executed when the credit was first obtained. For 
        example, they must not sell collateral out of trust. If 
        a customer violates the basic business security 
        agreement(s) and sells assets that are collateral for 
        the loan in question, and does not apply the proceeds 
        from the sale of the assets to the outstanding loan, 
        this action will limit the bank's ability to do problem 
        mitigation with the borrower.
           Communication: Every borrower and lender 
        relationship demands open and honest communication. The 
        identification of distress in a loan relationship 
        should not change the communication process. Timeliness 
        and the expectations for both the borrower and the bank 
        need to be clearly communicated on a regular and 
        ongoing basis.
           Responsibility for problem identification: 
        In most distressed loan situations, insufficient 
        repayment capacity is the root cause of the problem. As 
        the owner of the farm business, the borrower is 
        primarily responsible for developing a plan to cure the 
        problem. The lender's responsibility is to review the 
        borrower's plan and to advise the borrower on the 
        feasibility of the plan, and if the plan fits within 
        the underwriting standards of the bank.
           Plan development: The borrower typically 
        identifies potential expense reductions, any potential 
        for additional farm income, considers the potential for 
        non-farm income, identifies excess assets to sell, or 
        decides to liquidate the entire business. The borrower 
        may ask for time to allow him or her to refinance his 
        or her debt with another credit source.
           Evaluation of the plan: The feasibility of 
        the business plan completed by the borrower must be 
        evaluated by the bank to determine the farm 
        management's ability to succeed, the adequacy of 
        collateral for the loan, and the ability of the 
        operation to meet debt service requirements. Deadlines 
        for the execution of asset sales, expense reductions, 
        refinancing of debt by another source, or the 
        acquisition of non-farm employment are set and are 
        mutually agreed to by the borrower and the banker. Once 
        a plan is agreed to, the bank typically notifies the 
        borrower in writing.
           Plan execution: Once the plan is completed 
        and approved, bankers may use several tools to assist 
        distressed borrower. Not all banks will offer the same 
        options. What each individual bank will do is dependent 
        upon the risk tolerance of management, the loan policy 
        of the individual bank, regulatory circumstances, and 
        other factors (such as whether or not the loan has been 
        sold or participated).
           Monitoring the plan: When a plan is agreed 
        to by a borrower and the bank, it must be monitored by 
        both parties for performance compliance. Mutually 
        agreeing to a set of objectives to be met on an agreed 
        upon schedule is of the utmost importance.
           Resolution of the problem: Once the problem 
        period has passed, and the business has recovered, the 
        borrower is expected to return to the original 
        repayment plan unless otherwise agreed to.
           Bankruptcy: At all times, farm business 
        owners have the option to try to restructure their 
        business debt through bankruptcy, including Chapter 12 
        which is reserved for family farmers who are defined in 
        the statute. In addition to Chapter 12, farmers have 
        Chapter 11, 7, and 13 available to them depending upon 
        their individual circumstances.\303\
---------------------------------------------------------------------------
    \303\ Id.
---------------------------------------------------------------------------
    Because FSA guarantees loans made by both FCS and 
commercial banks, it is possible to obtain limited data on 
commercial bank loan write-offs through FSA data. It is 
important to note, though, that FSA is the lender of last 
resort; therefore, commercial bank loans guaranteed by FSA are 
by definition to borrowers who were unable to get a regular 
commercial bank loan. As noted earlier in this section, USDA 
does have regulations instructing lenders whose loans it 
guarantees to take steps to keep borrowers out of foreclosure 
through restructuring. However, the provisions appear to have 
little enforcement. Therefore, commercial banks' willingness 
and ability to restructure FSA guaranteed loans may provide 
information on their ability and willingness to restructure 
regular loans held by the bank.
    Out of all FSA guaranteed loans made in the past seven 
years, loans made by commercial lenders had a delinquency rate 
of 1.97 percent, while loans made by FCS institutions had a 
rate of 1.14 percent. For guaranteed loans that eventually had 
to be written off as unrecoverable over the same time span, FSA 
data show a loss rate of 0.61 percent for commercial banks 
versus 0.20 percent for FCS institutions.\304\ The commercial 
bank delinquency rate above is less than two times that of FCS 
institutions. By the time troubled loans must be written off, 
the loss rate gap has widened to three times higher for 
commercial credit.
---------------------------------------------------------------------------
    \304\ FSA loan servicing officials provided the Panel with loan 
loss rate statistics through a data request to their internal loan 
tracking system. The data is accurate as of June 30, 2009.
---------------------------------------------------------------------------
    Here again though, insufficient and missing data prevent 
drawing any solid conclusions from these data. FSA staff notes 
that the above delinquency rate was gathered through self-
reporting by institutions. Thus, what one lender reports as 
delinquent 30 days after a missed payment, another lender may 
consider a loan that is in essence still current and only 
delinquent in form. More importantly, since FSA does not track 
the lender type engaging in a restructuring, the Panel is 
unable to conclude whether commercial banks' higher write-off 
rate is a consequence of conducting fewer restructurings or due 
to another cause, such as higher-risk lending.
    ii. Home Affordable Modification Program. While commercial 
banks do not have a requirement to restructure farm loans, the 
residential mortgage restructuring program provides insight 
into the effectiveness of a requirement on TARP recipient banks 
to restructure a specific type of loan. On March 4, 2009, 
Treasury announced the Home Affordable Modification Program 
(HAMP) as part of its Making Home Affordable (``MHA'') 
initiative. Treasury estimates that three to four million 
potentially at-risk homeowners could benefit from HAMP through 
mortgage modification. HAMP is funded by a government 
commitment of $75 billion, which is comprised of $50 billion of 
TARP funds and $25 billion from the Housing and Economic 
Recovery Act. The $50 billion of TARP funds is directed toward 
modifying private-label mortgages, and the $25 billion from the 
Housing and Economic Recovery Act is dedicated to the 
modification of Fannie Mae and Freddie Mac mortgages.
    The goal of HAMP is to prevent foreclosures by creating a 
partnership between Treasury and private institutions in order 
to reduce borrowers' monthly payments to an affordable level. 
In addition to creating monetary incentives for the 
modification of at-risk mortgages, HAMP standardizes loan 
modification guidelines in order to create an industry 
paradigm. Also, all TARP recipients will be required to use 
these guidelines for loan modifications going forward.
    Eligibility Requirements--The loan must have originated on 
or prior to January 1, 2009. The mortgage must be a first lien 
on an owner-occupied property with an unpaid balance up to 
$729,750.\305\ There is no maximum or minimum loan-to-value 
(LTV) requirement to participate in HAMP. Borrowers in 
bankruptcy or in active litigation regarding their mortgage can 
participate in the program without waiving their legal rights.
---------------------------------------------------------------------------
    \305\ The unpaid balance ceiling increases in relation to number of 
units on the property (2 units--$934,200; 3 units--$1,129,250; 4 
units--$1,403,400).
---------------------------------------------------------------------------
    Incentives--There are a number of incentives aimed at both 
encouraging participation of borrowers, servicers, and 
investors and at maintaining a focus on successful results. 
First, servicers receive an up-front fee of $1,000 for each 
completed modification. Second, servicers receive ``Pay-for-
Success'' fees of up to $1,000 each year for up to three years. 
These fees will be paid monthly and are predicated on the 
borrower staying current on the loan. Borrowers are eligible 
for ``Pay-for-Performance Success Payments'' of up to $1,000 
each year for up to five years, as long as they stay current on 
their payment. This payment is applied directly to the 
principal of their mortgage. The ``Responsible Modification 
Incentive Payment'' is a one-time bonus payment of $1,500 to 
the lender/investor and $500 to servicers that will be awarded 
for modifications made while a borrower is still current on 
payments. Finally, Treasury estimates that up to 50 percent of 
at-risk mortgages have second liens.\306\ In order to address 
second lien debts, such as home equity lines of credit or 
second mortgages, HAMP encourages servicers to contact second 
lien holders and negotiate the extinguishment of the second 
lien. The servicers will receive a payment of $500 per second 
lien modification, as well as success payments of $250 per year 
for three years, as long as the modified first loan remains 
current.
---------------------------------------------------------------------------
    \306\ U.S. Department of the Treasury, Making Home Affordable: 
Program Update (Apr. 28, 2009) (online at www.financialstability.gov/
docs/042809SecondLienFactSheet.pdf).
---------------------------------------------------------------------------
    Debt Ratios--The front end debt-to-income (DTI) target is 
31 percent. The lender will first have to reduce the borrower's 
mortgage payments to no greater than a 38 percent front end DTI 
ratio. Treasury will then match the investor/lender dollar-for-
dollar in any further reductions, down to a 31 percent front 
end DTI ratio for the borrower. Treasury has established a two 
percent floor below which it will not subsidize interest rates. 
Lenders and servicers could reduce principal rather than 
interest and would receive the same funds available for an 
interest rate reduction. Servicers must follow a strict step-
by-step standardized formula known as the ``Standard 
Waterfall'' to achieve the 31 percent front-end DTI ratio.\307\
---------------------------------------------------------------------------
    \307\ Step 1a: Request Monthly Gross Income of borrower. Step 1b: 
Validate first lien debt and monthly payments. This information is used 
to calculate a provisional modification for the trial period. Step 2: 
Capitalize arrearage. Step 3: Target front end DTI of 31 percent and 
follow steps 4,5,6 in order to reduce borrower's monthly payment. Step 
4: Reduce the interest rate to achieve target (two percent floor). The 
guidelines specify reductions in increments of 0.125 percent that 
should bring the monthly payments as close to the target without going 
below 31 percent. If the modified interest rate is above the Interest 
Rate Cap as defined by Treasury, then the modified interest rate will 
remain in effect for the remainder of the loan. If the modified 
interest rate is below the Interest Rate Cap, it will remain in effect 
for five years followed by annual increases of 1 percent until the 
interest rate reaches the Interest Rate Cap. The modified interest rate 
will then be in effect for the remainder of the loan. Step 5: If the 
Front end DTI target has not been reached, the term or the amortization 
of the loan may be extended up to 40 years. Step 6: If the Front end 
DTI target has still not been reached, it is recommended that the 
servicer forbear principal. If there is principle forbearance then a 
balloon payment of that amount is due upon the maturity of the loan, 
the sale of the property, or the payoff of the interest bearing 
balance.
---------------------------------------------------------------------------
    Counseling--If the borrower has a back-end DTI ratio of 55 
percent or more, he or she must enter a debt counseling 
program.
    Cost assessment of foreclosure versus modification--A Net 
Present Value (NPV) test is required for each loan that is in 
``Imminent Default'' or is at least 60 days delinquent. First, 
servicers should determine the NPV of the proceeds from the 
liquidation and sale of a mortgaged property. Variables to take 
into account are:
          1. The current market value of the property as 
        established by a broker's price opinion, automated 
        valuation methodology, or appraisal;
          2. The cost of foreclosure proceedings, repair and 
        maintenance of the property;
          3. The time to dispose of the property if not sold at 
        foreclosure auction;
          4. Costs associated with the marketing and sale of 
        the property as real estate owned; and
          5. The net sales proceeds.\308\
---------------------------------------------------------------------------
    \308\ Jordan D. Dorchuck. Net Present Value Analysis and Loan 
Modifications, Mortgage Bankers Association (Sept. 15, 2008) (online at 
www.mortgagebankers.org/files/Conferences/2008/
RegulatoryComplianceConference08/
RC08SEPT24ServicingJordanDorchuck.pdf).
---------------------------------------------------------------------------
    Second, servicers should determine the proceeds from a loan 
modification. Treasury has established parameters for running 
the NPV for modification test.\309\ The NPV of the foreclosure 
scenario is then compared to an NPV for a modification 
scenario. If the NPV of the modification scenario is greater, 
then the servicer must modify the loan.
---------------------------------------------------------------------------
    \309\ The servicer may choose the discount rate for the 
calculation, although there is a ceiling set by the Freddie Mac Primary 
Mortgage Survey rate (PMMS), plus a spread of 2.5 percentage points. 
The servicer may apply different discount rates to loans in investor 
pools versus loans in portfolio. Cure rates and redefault rates must be 
based on GSE analytics. Servicers having at least a $40 billion 
servicing book have the option to substitute GSE established cure rates 
and redefault rates with the experience of their own aggregate 
portfolios.
---------------------------------------------------------------------------
    Home Price Depreciation Payments--Lender compensation will 
be provided to partially offset losses from home price 
declines. The payment is linked to declines in the home price 
index. The Administration, working with the FDIC, will provide 
up to $10 billion for this program. The goal is to discourage 
servicers and lenders from pursuing foreclosure at the present 
due to weakening home prices.
    Monitoring--Servicers are required to maintain records for 
verification/compliance reviews. All borrowers must fully 
document income, including a signed IRS 4506-T form, their two 
most recent pay stubs, and their most recent tax return. In 
addition, borrowers must also sign an affidavit of financial 
hardship. Property owner occupancy status will be verified 
through a borrower credit report and other documentation; no 
investor-owned, vacant, or condemned properties are eligible.

                3. ISSUES RAISED BY RESTRUCTURING MODELS

    The Helping Families Save Their Homes Act directed the 
Panel to produce a special report on farm loan restructuring. 
As part of the report, the Panel was asked to examine ``any 
programs for direct loan restructuring or modification carried 
out by the Farm Service Agency of the Department of 
Agriculture, the Farm Credit System, and the Making Home 
Affordable Program of the Department of the Treasury.''
    The Panel's analysis of each of the three restructuring 
models first considers key factors that differentiate the 
lenders, the type of loans they offer, and the type of 
borrowers that they serve from the commercial bank farm credit 
market that would be affected by a potential TARP-based loan 
restructuring requirement. The analysis then proceeds to a 
discussion of the restructuring models themselves, issues 
raised by each model's inherent structure and operation, and 
possible challenges that could shape the effectiveness of the 
model should it be applied to commercial bank farm loans.
    One general issue to consider when analyzing the 
applicability of any of the three models to the commercial bank 
farm credit market is the presence or lack thereof of junior 
liens. As evidenced by the residential mortgage market, junior 
liens can significantly complicate the restructuring process, 
because the junior lien holder has little incentive to 
extinguish the lien, but a primary mortgage cannot be 
restructured without such consent.\310\ While it is not 
uncommon for farmers to have multiple lines of credit, not all 
farm loans are secured by real estate, and data are not 
available regarding the prevalence of second liens on farms. 
However, it should be noted that the extent to which second 
liens are present could ease or complicate the application of 
any of the loan restructuring models.
---------------------------------------------------------------------------
    \310\  As noted in the Panel's March report, Foreclosure Crisis: 
Working Toward a Solution, ``Junior mortgages pose a significant 
obstacle to restructurings of first mortgages because of junior 
mortgagees' ability to free ride on modifications and hold up 
refinancings. Any modification that reduces payments on the first 
mortgage benefits the junior mortgagee because the modification frees 
up income that is available to service the junior mortgage. Because of 
this free riding problem, first mortgagees may be reluctant to engage 
in modifications.''
    It goes on to note ``Junior mortgagees are able to stymie 
refinancings of first mortgages. Unless the junior mortgagee's consent 
is gained, the junior mortgage gains priority over the refinancer. As a 
result, refinancing is extremely difficult unless the junior mortgagee 
agrees to remain subordinated, and junior mortgagees often seek a 
payment for this. The problem is particularly acute with totally 
underwater junior mortgages, who only have hold-up value in their 
mortgage.'' Congressional Oversight Panel, Foreclosure Crisis: Working 
Toward a Solution, at 50 (Mar. 6, 2009) (online at cop.senate.gov/
documents/cop-030609-report.pdf) (hereinafter ``March COP Report'').
---------------------------------------------------------------------------
    Finally, while within each model it is clearly paramount to 
compare the cost of loan restructuring with the cost of 
foreclosure to come to a rational decision on the direction in 
which to proceed, in comparing the restructuring models to each 
other, it can be expected that the cost of foreclosure in each 
case would be virtually the same. Therefore, it is important to 
consider the resources that restructuring loans through each of 
these processes would consume relative to each model's 
potential benefits. Data are not available on the relative 
value for the lender of farm loan restructuring compared to 
farm foreclosures, though bank and FCS witnesses at the Panel's 
field hearing indicated that they can often get better value 
via a loan restructuring than by prosecuting a 
foreclosure.\311\
---------------------------------------------------------------------------
    \311\ See Congressional Oversight Panel, COP Field Hearing in 
Greeley, CO, on Farm Credit (July 7, 2009) (audio available online at 
cop.senate.gov/hearings/library/hearing-070709-farmcredit.cfm).
---------------------------------------------------------------------------

a. FSA

    Any attempt to transfer FSA's loan restructuring model to a 
wider group of borrowers must first keep in mind the unique 
nature of FSA and of those who utilize its loan products. 
First, given that FSA is the lender-of-last-resort for the 
agriculture sector, FSA borrowers are necessarily less 
creditworthy than borrowers at commercial banks and FCS 
(perhaps increasing the likelihood that foreclosure would be a 
rational option for FSA loans, but above all making FSA loans 
and borrowers distinct from those of other farm lenders). FSA, 
therefore, as a specialized institution, has programs designed 
specifically to meet the needs of the type of farmers that it 
serves, and the fact that FSA holds a small slice of overall 
farm debt--less than 2.5 percent--means that its model has 
never been attempted on a larger, sector-wide scale. The dollar 
amounts confronted by FSA in modifying loans are also a key 
difference between FSA and other lenders, as FSA loans must 
fall below statutory limits.
    Of the various models examined in the previous section, 
restructuring based on FSA direct loan model would clearly be 
the most involved. The onus of taking action for a 
restructuring under this program falls on FSA, rather than the 
borrower. FSA is not only required by statute to notify the 
borrower of a potential default, but it is also required to lay 
out and present all of the options for restructuring a loan to 
the borrower. Under the FSA loan guarantee model, the lender 
must notify the borrower of a potential default; however, it is 
the borrower who must present the various options for 
restructuring to the lender. Representatives from FSA estimated 
that for each direct loan that FSA restructures, it spends 
about 40 hours of staff time processing and completing that 
restructuring.\312\ However, FSA currently uses a streamlined 
substitute process for loans that will be modified via 
reamortization or a deferral as opposed to an interest rate or 
principal reduction.\313\ This process takes approximately 10 
hours.
---------------------------------------------------------------------------
    \312\ These time estimates were provided to Panel staff by staff of 
the FSA, and the estimates are based on a Delphi study undertaken by 
the FSA in 2000 in an effort to determine staffing needs. In conducting 
the study, the FSA sampled county offices in regions across the country 
to estimate the amount of time required to complete different tasks, 
including loan restructuring.
    \313\ The regulations that guide the implementation of the FSA's 
loan restructuring program require that reamortization, rescheduling, 
and consolidation be considered prior to a deferral, and that all of 
these options be considered prior to moving to the more labor-intensive 
process of considering interest rate reduction or principal write down. 
See U.S. Department of Agriculture, Farm Service Agency, FSA Handbook: 
Direct Loan Servicing--Special and Inventory Property Management, at 4-
51 and 4-71 (Dec. 31, 2007) (online at www.fsa.usda.gov/Internet/
FSA_File/5_flp_r00_a06.pdf).
---------------------------------------------------------------------------
    The time and individual attention that each loan receives, 
consequently, as well as USDA's knowledge of the agriculture 
sector that FSA brings to the process, is paramount to ensuring 
that the borrowers whose loans are modified do not become 
delinquent once again (FSA discussed the low re-default rate of 
modified FSA loans in its testimony at the Panel's Greeley, CO, 
field hearing).\314\ This approach is only possible because 
roughly half of FSA's mortgage modification administrative 
costs are paid for through direct appropriation (rather than a 
self-funding mechanism).\315\
---------------------------------------------------------------------------
    \314\ See Congressional Oversight Panel, Testimony of Acting State 
Executive Director for Colorado, Farm Service Agency, Gary Wall, COP 
Field Hearing in Greeley, CO, on Farm Credit (July 7, 2009) (audio 
available online at cop.senate.gov/hearings/library/hearing-070709-
farmcredit.cfm) (``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 debt, defer, or whatever, they seem to continue on after you do 
it'').
    \315\ See Omnibus Appropriations Act of 2009, Pub. L. No. 111-8, 
Title I.
---------------------------------------------------------------------------
    The involved nature of the process, as well as the 
specialized knowledge of the USDA farm loan officers who carry 
out the responsibilities of the restructuring process, offer a 
unique benefit to the FSA model. However, that involved process 
and specialized knowledge also make the process more difficult 
to replicate. Moreover, fundamental differences between FSA 
loans and borrowers and commercial loans and borrowers--and the 
share of farm debt held by FSA versus commercial banks--call 
into question the ease with which the FSA model could be 
applied.

b. Farm Credit System

    The FCS holds a significantly larger share of total farm 
debt than FSA (indeed, a comparable amount to commercial 
banks), perhaps increasing the likelihood that its loan 
modification program could serve as a reasonable model for 
banks. However, there are several key aspects of the FCS 
model--and FCS itself--that could complicate the model's 
implementation at commercial banks.
    The most important distinguishing factor for FCS is a 
general one: the FCS has a specific mandate to lend to farmers 
and those in rural America. Further, it is a relatively 
cohesive entity--5 funding banks and 90 associations that make 
loans, and it is owned by the members who utilize the 
cooperatives. On the other hand, farm loans are a small portion 
of total loans and leases at the vast majority of commercial 
banks.\316\ Consequently--as with FSA--when FCS modifies farm 
loans, it is doing so with a unique knowledge of the farm 
industry and its ebbs and flows, and the detailed list of items 
that FCS institutions must take into account when evaluating 
borrowers' proposals to modify their loans (to determine if the 
NPV of modifying the loan exceeds the NPV of foreclosure) 
requires knowledge of the peculiarities of the industry.
---------------------------------------------------------------------------
    \316\ Farm loans (real estate and non-real estate) make up less 
than 2 percent of total loans and leases in the U.S. banking system. 
See FDIC First Quarter Call Report Data, supra note 149.
---------------------------------------------------------------------------
    Further, the unique nature of the Credit Review Committee--
to which borrowers may appeal if their proposal to restructure 
their loan is rejected by their FCS institution--including the 
requirement that a farmer-elected board member serve on the 
review committee, could complicate the application of the FCS 
model to commercial banks.

c. Making home affordable

    There are a number of issues raised by the Home Affordable 
Modification Program that must be considered in analyzing the 
potential applicability of this loan restructuring model to 
distressed farm loans.
    While both the HAMP loan modification program and any 
potential TARP-based loan modification for farm loans would be 
carried out by commercial banks, there are several critical 
differences between the residential mortgage sector and farm 
credit markets that deserve mention. First and foremost, 
problems in the housing sector--though particularly acute in 
some regions as opposed to others--are deep and pervasive, with 
sharply declining property values combining with high levels of 
exotic, adjustable-rate and subprime mortgages to wreak havoc 
on homeowners across America. Conversely, current or future 
stresses in the agriculture sector can be expected to be 
scattered and the result of challenges unique to specific 
regions, sectors, or, indeed, individual borrowers. Further, 
the farm sector did not see widespread use of the type of 
nontraditional loan products that amplified the crisis in the 
housing sector, nor did securitization--and the accompanying 
failure of some banks to maintain appropriate underwriting 
standards that so often resulted--ever take root to any great 
extent in the farm sector.
    Considering the severe nature of the challenges in the 
housing sector, the HAMP loan modification program was, 
therefore, created with the goal of reaching a large number of 
homeowners, and the program's guidelines for mortgage services 
are standardized so as to facilitate widespread implementation 
of the program. However, FSA and FCS officials, commercial 
banking groups, and representatives of the farm sector have all 
stressed that modifying farm loans is an inherently nuanced and 
labor-intensive process, not suited to rigid models. Unlike 
residential mortgage modifications, which examine more 
straightforward items such as debts, income, and asset value, 
farm loan restructurings must also examine business plans, cash 
flows, and market conditions. Therefore, the feasibility of 
providing standardized guidelines for modifying farm loans that 
would be effective industry-wide--or the necessity of doing so 
on anything near the scale of the HAMP--would need to be 
considered. This is particularly true given that farm loans do 
not merely cover a farmer's home (if it is on his farm 
property) but are effectively business loans as well, and the 
ability of a farmer to repay is dependent on the idiosyncrasies 
of farm markets, volatile commodity prices, the farmer's 
business plan and, ultimately, cash flow. Because of this 
additional complexity, scrutiny would need to be given to how 
the tools, mechanisms, and procedures for dealing with 
distressed home loans through the HAMP could also be modified 
before attempting to apply the model to farm loans.
    In considering the impact of various loan restructuring 
models, policymakers should also consider the differing 
implications of whether a loan is more likely to be securitized 
or held on a bank's books. While over two-thirds of residential 
mortgages originated since 2001 are securitized,\317\ the 
percentage of farm loans securitized and sold into the 
secondary market remains quite low. This difference is 
important because lenders have different incentives to modify 
loans they hold in portfolio (and thus for which the lender 
would still hold all the risk) as compared to loans they merely 
service. It can also be easier to restructure portfolio loans, 
because for securitized loans there are competing interests 
within segments of MBS owners, adding another layer of 
complexity.\318\ This complexity can also impede foreclosure 
mitigation efforts, and it has been found that the foreclosure 
rate for securitized loans is higher than the rate for loans 
held on banks' balance sheets.\319\ While the fact that farm 
loans are generally not securitized could work to make it 
easier to implement a farm loan restructuring program, in 
considering the usefulness of HAMP as a model, it important to 
keep in mind that HAMP was designed to be used principally in 
the highly securitized residential mortgage market, and thus 
includes incentives to overcome barriers that may not exist in 
the farm sector.
---------------------------------------------------------------------------
    \317\ March COP Report, supra note 310, at 40.
    \318\ March COP Report, supra note 310, at 46.
    \319\ Tomasz Piskorski et al., Securitization and Distressed Loan 
Renegotiation: Evidence from the Subprime Mortgage Crisis, University 
of Chicago Booth School of Business Working Paper, at 3 (Dec. 2008) 
(No. 09-02) (online at papers.ssrn.com/abstract=1321646) (finding a 19-
33 percent decrease in the relative mean foreclosure rate among 
portfolio loans).
---------------------------------------------------------------------------
    Additional considerations when contemplating applying the 
HAMP model to troubled farm loans are the effectiveness of the 
HAMP model itself in reducing preventable foreclosures and the 
incentive system that guides HAMP's implementation. With regard 
to the former, since HAMP is still in its early stages, its 
record is incomplete to assess its success fully (and thus 
incomplete to determine whether this would be an appropriate 
model to apply). While Treasury has reported contacting 
numerous borrowers and extending modification offers,\320\ it 
also acknowledges problems.\321\
---------------------------------------------------------------------------
    \320\ Congressional Oversight Panel, Testimony of Assistant 
Treasury Secretary for Financial Stability Herbert Allison, Jr., 
Hearing with Assistant Treasury Secretary Herbert Allison (June 24, 
2009) (online at cop.senate.gov/hearings/library/hearing--062409--
allison.cfm) (``We have now over 200,000 offers for modifications out 
there''). See also U.S. Department of the Treasury, Making Home 
Affordable Progress Report (May 14, 2009) (online at http://
www.ustreas.gov/press/releases/docs/05142009ProgressReport.pdf) (``The 
14 participating servicers have . . . mailed out over 300,000 letters 
with information about trial modifications to borrowers'').
    \321\ Congressional Oversight Panel, Testimony of Assistant 
Treasury Secretary for Financial Stability Herbert Allison, Jr., 
Hearing with Assistant Treasury Secretary Herbert Allison (June 24, 
2009) (online at cop.senate.gov/hearings/library/
hearing_062409_allison.cfm) (In reply to Mr. Neiman's assertion that 
the HAMP program was plagued by confusion and delays, Assistant 
Secretary Allison replied: ``We certainly are concerned . . . I think 
we need to keep in mind that this is a massive program of a size never 
before attempted.'') (In reply to questions regarding fraud-prevention 
policies, Secretary Allison stated: ``we're doing our best with a 
system that wasn't designed for this type of a crisis and trying to 
make the best of it as it exists.'').
---------------------------------------------------------------------------
    Finally, it should be noted that HAMP is an incentive based 
system, providing payments for various participants, and not 
requiring those banks that received TARP dollars prior to its 
implementation to participate in the program. In total, $75 
billion has been set aside for incentive payments. It is 
unclear what level of subsidization would be required for farm 
restructuring incentives. Nevertheless, it should be noted 
that, in the HAMP model, when compared with the others, the 
administrative costs are borne more directly by taxpayers.

             4. GENERAL ISSUES FOR POLICYMAKERS TO CONSIDER

a. Need

    In assessing the state of the farm credit markets and 
considering the use of loan restructuring as an alternative to 
foreclosure by TARP recipients, policymakers must first 
determine whether there is a need. To make such a 
determination, the Panel's analysis examined a number of 
factors including: the demand for and availability of credit in 
the agriculture sector, charge-offs and delinquencies of 
agricultural loans, values of farm real estate and bank 
holdings of farmland, debt-to-asset ratios of farmers, and farm 
income and profitability.
    At the Panel's July 7th field hearing in Greeley, CO, 
Michael Scuse, Deputy Undersecretary of USDA's Farm and Foreign 
Agricultural Services (FFAS), noted the following:

          Reports from the Federal Reserve and other sources 
        indicate there is a tightening of credit for farmers 
        and ranchers around the 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 their 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.\322\
---------------------------------------------------------------------------
    \322\ Scuse Testimony, supra note 64.

    While Federal Reserve data may indicate some tightening of 
credit in agricultural lending, the data are mixed, and the 
actual availability of credit in the months ahead remains 
unclear. Five of the six Federal Reserve district first quarter 
agricultural lending surveys show that approximately 70 percent 
of banks reported either the same or higher demand for farm 
operating loans as compared to a year earlier. However, in one 
district (Richmond) 48 percent of its bank respondents said 
demand for such loans was lower compared to a year ago.\323\ 
Three district surveys (Chicago, Richmond, and Dallas) show 80 
percent, 60 percent, and 61 percent of banks expecting the same 
or higher volume of real estate loans in the next quarter as 
compared to a year earlier.\324\ However, four districts also 
reported a rise in the percentage of banks referring loan 
applicants to non-bank agencies (for example, FSA) as compared 
to a year earlier.\325\ Overall, the survey results are mixed, 
and this is an area that merits further monitoring.
---------------------------------------------------------------------------
    \323\ Second Quarter Fed Databook, supra note 2, Table C.1.
    \324\ Second Quarter Fed Databook, supra note 2, Table C.1.
    \325\ Second Quarter Fed Databook, supra note 2, Table C.1.
---------------------------------------------------------------------------
    Deputy Undersecretary Scuse's testimony before the Panel 
also highlights the increased demand for FSA's direct and 
guaranteed operating loan programs. Of particular note, ``45 
percent of the direct operating loans approved in FY2009 were 
for customers who did not have existing FSA operating loans,'' 
which according to Secretary Scuse is normally ``about 20 
percent.'' \326\ There are a number of factors that could 
explain the increase in demand in addition to a tightening of 
credit in the commercial credit markets. The increase could 
also be due in part to recent expansions in the FSA direct 
operating loan program itself. The program received an 
additional $173 million in authority under the American 
Recovery and Reinvestment Act signed into law earlier this 
year. Moreover, the 2008 Farm Bill raised the lending limit for 
FSA direct loans from $200,000 to $300,000.\327\
---------------------------------------------------------------------------
    \326\ Second Quarter Fed Databook, supra note 2, Table C.1.
    \327\ Food, Conservation, and Energy Act of 2008, Pub. L. No. 110-
246 (codified at 7 U.S.C. Sec. 1925 (a)).
---------------------------------------------------------------------------
    Federal Reserve data on commercial bank delinquencies and 
charge-offs on loans to finance agricultural production show a 
steady uptick in each of the last four quarters. The 
delinquency rates on agricultural loans (seasonally adjusted) 
were 1.06 percent in the first quarter of 2008; 1.11 percent in 
the second quarter of 2008; 1.23 percent in the third quarter 
of 2008; 1.43 percent in the fourth quarter of 2008; and 1.71 
percent in the first quarter of 2009. Charge-off rates for 
agricultural loans (seasonally adjusted) were .08 percent in 
the first quarter of 2008; .16 percent for the second quarter 
of 2008; .18 percent in the third quarter of 2008; .28 percent 
in the fourth quarter of 2008; and .42 percent in the first 
quarter of 2009.\328\ Despite a steady increase, commercial 
bank delinquency rates and charge-offs put into the context of 
the last 20-25 years are still quite low. Commercial bank 
delinquency rates (seasonally adjusted) peaked at 9.08 percent 
in the first quarter of 1987, and have not risen above 2 
percent since the fourth quarter of 2003. Commercial bank 
charge-off rates (seasonally adjusted) peaked at 5.23 percent 
in the fourth quarter of 1985, but have only once topped 1 
percent (1.03 percent in the third quarter of 2001) since the 
second quarter of 1988.\329\
---------------------------------------------------------------------------
    \328\ See Board of Governors of the Federal Reserve System, Federal 
Reserve Statistical Release: Charge-Offs and Delinquency Rates on Loans 
and Leases at Commercial Banks (online at www.federalreserve.gov/
releases/chargeoff/chgallsa.htm).
    \329\ Id.
---------------------------------------------------------------------------
    Of concern to the Panel is the increase in the value of 
commercial bank holdings of farmland, which may indicate an 
increase in farm loan foreclosures. The value of farmland in 
bank possession more than doubled last year, increasing from 
$60.7 million in the first quarter of 2008 to $122.4 million in 
the first quarter of 2009. While the average value per acre of 
farmland in the U.S. reached a record high of $2,170 per acre 
in 2008 (an increase of 7.96 percent from 2007), the overall 
increase in farmland value alone cannot explain the increase in 
the value of farmland held by banks. The current value of 
farmland held in bank possession is still well below the level 
reached in 1992 (when it exceeded $424 million), however, the 
increase in the first quarter of 2009 is significant and merits 
careful observation by Congress.
    Finally, on a more positive note, the Panel notes that the 
national debt-to-asset ratio for farmers is at a historically 
low level, and that the average U.S. farm operator household 
income, which has surpassed overall average U.S. household 
income every year since 1996, appears strong. However, the 
Panel also notes the increasing reliance of farmers on non-farm 
sources of income, which in 2009 is expected to exceed 95 
percent for the first time in history.\330\ While it is unclear 
how this increasing reliance on non-farm sources of income will 
affect farmers' future ability to pay off their agricultural 
loans, this is an area that also bears watching. As stated 
earlier, the rising dependence on off-farm income could make 
small farms increasingly vulnerable to outside economic 
conditions.
---------------------------------------------------------------------------
    \330\ U.S. Department of Agriculture, The 2008/2009 World Economic 
Crisis: What It Means for U.S. Agriculture (Mar. 2009) (online at 
www.ers.usda.gov/Publications/WRS0902/WRS0902.pfd).
---------------------------------------------------------------------------
    In determining the immediate need for a restructuring 
mandate of agricultural loans by TARP recipients, the Panel's 
analysis is inconclusive. Several factors such as generally low 
delinquency and charge-off rates, a historically low farmer 
debt-to-asset ratio, and record U.S. farm operating income 
levels suggest that an agricultural restructuring requirement 
may be premature. However, other factors such as a possible 
tightening of the farm credit markets, an uptick in the 
delinquency and charge-off rates, an increase in the value of 
commercial bank holdings of farmland, and a growing reliance of 
farmers on non-farm sources of income remain areas of concern 
for the Panel and deserve further monitoring. If trends in 
these areas continue, the need for a restructuring mandate may 
be clearer.

b. Other options for farmers

    Congress has other tools available that may provide 
indirect relief for distressed farm loans. Most troubled loan 
situations arise from insufficient repayment capacity. 
Therefore, other programs providing assistance to farmers have 
the potential to ease a distressed loan situation.
    Congress has established a variety of programs to assist 
struggling farmers, whether they specialize in some type of 
commodity crop or livestock production. This assistance is 
provided through a wide array of government initiatives, 
including fixed direct payments, counter cyclical payments, 
marketing loan benefits, conservation grants, emergency relief, 
and income loss contract payments. According to USDA, 40 
percent of farms received government payments in 2007, 
averaging $9,792 per operation.\331\ The current recession has, 
however, affected all sectors of the economy, including 
agriculture. Net farm income and farmer net cash income, which 
reached record levels in 2008, are expected to decline 
dramatically in 2009.\332\ It is noteworthy that government 
assistance through direct payments is also expected to decline 
in 2009.\333\ Direct government payments are forecast at $11.4 
billion in 2009 (comprising over 16 percent of total net farm 
income expected for 2009), which is down about 8 percent from 
$12.4 billion in 2008, and well below the record of $24.4 
billion in 2005.\334\ The decline can be explained in large 
part due to a $2.4 billion decrease in emergency disaster 
assistance expected for 2009. Emergency disaster assistance is 
projected to be only $0.26 billion in 2009.\335\ While the 2008 
Farm Bill created a permanent fund for disaster assistance, 
many agricultural producers will not receive payments until 
2010.\336\
---------------------------------------------------------------------------
    \331\ U.S. Department of Agriculture, Economic Research Service, 
Farm Income and Costs: 2009 Farm Sector Income Forecast (online at 
www.ers.usda.gov/Briefing/FarmIncome/nationalestimates.htm) (accessed 
July 20, 2009).
    \332\ Id.
    \333\ Id.
    \334\ Id.
    \335\ Id.
    \336\ Public Law No. 110-246.
---------------------------------------------------------------------------
    Other payments are projected to increase. The lower market 
prices forecast for 2009 are expected to generate moderate 
increases in payments under two major price contingent 
programs, counter-cyclical payments (CPP) and marketing loan 
benefits.
    As mentioned earlier in the report, dairy has been the 
hardest hit of all farm sectors. There are two federal programs 
that assist dairy farmers by providing price supports for dairy 
products: the Milk Income Loss Contract Program (MILC) and the 
Dairy Product Price Support Program (DPPSP). Payments under 
both programs have already been triggered. Under the DPPSP, the 
Commodity Credit Corporation (CCC) purchases surpluses of 
nonfat dry milk, cheese, and butter from dairy processors. CCC 
expects to remove 234 million pounds of dry nonfat dry milk 
this year; it removed 111 million pounds of nonfat dry milk in 
2008.\337\ In addition, in February of this year, USDA started 
making payments to participating dairy farmers under MILC, 
another federally sponsored price support system. Federal MILC 
payments are expected to amount to $700 million in 2009.\338\
---------------------------------------------------------------------------
    \337\ U.S. Department of Agriculture, Economic Research Service, 
Livestock, Dairy, and Poultry Outlook (January 2009) (See online at: 
http://www.ers.usda.gov/publications/ldp/2009/06Jun/ldpm180.pdf).
    \338\ U.S. Department of Agriculture, Economic Research Service, 
Farm Income and Costs: 2009 Farm Sector Income Forecast (See online at: 
http://www.ers.usda.gov/Briefing/FarmIncome/nationalestimates.htm).
---------------------------------------------------------------------------
    In testimony before the Panel, Les Hardesty, Chairman of 
the Dairy Farmers of America Mountain Area Council, suggested 
that dairy farmers might best be helped through the Commodity 
Credit Corporation (CCC). Mr. Hardesty testified that ``if TARP 
funding was used temporarily to increase the CCC [Commodity 
Credit Corporation] purchase price for cheese and nonfat dry 
milk, all of those products could go back immediately into food 
assistance programs.'' \339\
---------------------------------------------------------------------------
    \339\ Hardesty Testimony, supra note 65.
---------------------------------------------------------------------------
    Crop growers also have various options for assistance. Crop 
insurance policies cover many major crops in most areas of the 
country. In total, crop insurance is available for more than 
100 crops. Four major crops--corn, cotton, soybeans, and 
wheat--account for more than two-thirds of sectors covered by 
crop insurance.\340\ Certain livestock and dairy producers are 
also covered under various pilot programs designed to protect 
producers from loss of gross margin or price declines. Another 
potential avenue of assistance for crop farmers is the Average 
Crop Revenue Election (ACRE) program, which was created in the 
2008 Farm Bill. According to the Food and Policy Research 
Institute, ``ACRE is a voluntary program that makes payments to 
producers when state per acre revenues for a particular 
commodity fall below a trigger tied to a moving average of 
national prices and state level yields.'' The FPRI predicts 
that ``ACRE is likely to be attractive to grain and oilseed 
producers, providing more payments on average than the 
traditional payments that program participants must agree to 
forgo.'' \341\
---------------------------------------------------------------------------
    \340\ Congressional Research Services, Federal Crop Insurance: 
Background and Issue (April 17, 2009) (See online at: http://
www.nationalaglawcenter.org/assets/crs/R40532.pdf).
    \341\ Food and Policy Research Institute (FPRI) 2009 U.S. and World 
Agricultural Outlook, (January 2009).
---------------------------------------------------------------------------
    While these options incur a cost for taxpayers, some loan 
restructuring models, such as the housing foreclosure 
mitigation program, also require taxpayer funding. These 
programs provide Congress with possible alternatives, but could 
allow more specific targeting, thereby matching assistance to 
the sectors and areas of greatest need.

c. Effect on TARP participation

    Congress must also consider the possible effect on TARP, 
and what changing the rules could mean for both current and 
future participants of either TARP or any other federal effort 
to address the financial crisis. In its July oversight report 
on TARP repayments, the Panel noted that a ``motivation for 
prompt repayment of TARP investments has to do with the 
specific rules or conditions to which TARP recipients are 
subject.'' \342\ ``Changing of rules'' was a concern 
specifically addressed in a memo dated March 30, 2009, from the 
American Bankers Association to Members of Congress regarding 
legislation that would have further restricted compensation of 
employees at TARP recipient banks.
---------------------------------------------------------------------------
    \342\ Congressional Oversight Panel, July Oversight Report: TARP 
Repayments, Including the Repurchases of Stock Warrants (July 2009).

          Beyond this unfairness to these institutions and bank 
        employees, there is a much broader concern about how 
        banks can be involved with the government in 
        stimulating the economy when the rules keep changing. 
        The intention of the CPP [Capital Purchase Program] was 
        to stimulate new lending and to provide healthy, well-
        run banks with capital to weather the economic storm. 
        The changes proposed send the opposite message. They 
        signal to any strong, viable bank that any involvement 
        by the government in the business of private enterprise 
        brings with it significant risk and costs, not the 
        least of which is the unilateral changing of rules at 
---------------------------------------------------------------------------
        any time.\343\

    \343\ See Memorandum from Floyd Stoner, American Bankers 
Associations to Members of the House of Representatives (March 30, 
2009) (online at www.aba.com/NR/rdonlyres/76DCD307-2D7E-48A6-A10F-
623175F0AEAD/59034/ExecComp_ABAHouseLetter_033009.pdf).
---------------------------------------------------------------------------
    In its May report, the Panel noted that investors had 
questions as to whether or not investors of the Term Asset-
Backed Securities Loan Facility (TALF) would be subject to 
conditions placed on participants in the TARP generally.\344\ 
In fact, the prime reason cited for modest participation in 
TALF was uncertainty regarding the political risks of 
participation. TALF participants desired clear and unambiguous 
statements from both executive and congressional officials. In 
an April 18th speech, William Dudley, President of the Federal 
Reserve Bank of New York, said the following: ``the 
effectiveness of some of the Fed facilities have been undercut 
by stigma . . . or by worries about what other strings are or 
might be attached to the use of the facilities . . .''
---------------------------------------------------------------------------
    \344\ Congressional Oversight Panel, May Oversight Report, Reviving 
Lending to Small Businesses and Families and the Impact of TALF (May 
2009).

          One reason why the TALF has gotten off to a 
        relatively slow start is the reluctance of investors to 
        participate . . . Some investors are apparently 
        reluctant not because the economics of the program are 
        unattractive, but because of worries about what 
        participation might lead to. The TARP loans to banks 
        led to intense scrutiny of bank compensation practices 
        given that TALF loans are ultimately secured by TARP 
        funds, investor anxiety about using the program has 
        risen.\345\
---------------------------------------------------------------------------
    \345\ See Federal Reserve Bank of New York, Prepared Remarks by 
William C. Dudley, President and Chief Executive Officer, at Vanderbilt 
University: The Federal Reserve's Liquidity Facilities (Apr. 18 2009) 
(online at www.newyorkfed.org/newsevents/speeches/2009/dud090418.html) 
(characterizing fears expressed by some investors that participation in 
TALF may lead to increased regulation of investor practices as 
``misplaced'' but ``understand[able] . . . given the political 
discourse'' and the ``intense scrutiny of bank compensation practices'' 
that arose from TARP investments in financial institutions).

    Unlike FSA and FCS, a TARP recipient bank could choose to 
avoid a loan restructuring mandate by repaying its loan and 
exiting the TARP program. Other banks could choose to avoid a 
TARP recipient bank restructuring mandate by declining to 
participate in TARP in the first place. Yet, Treasury has made 
repeated efforts to improve participation. On May 13, Treasury 
tried to bolster the participation of smaller community banks 
by extending their application deadline for the Capital 
Purchase Program by another six months.\346\ Later that month, 
Treasury also tried to encourage all financial institutions in 
need of further capital from Treasury to seek such capital by 
extending the application deadline for the Capital Assistance 
Program by another six months as well.\347\ However, Congress 
must consider whether conditionality would run counter to 
Treasury's objective by impacting participation in these and 
other TARP-related programs. Ultimately, Congress will have to 
weigh the potential cost of creating a mandate against the 
potential benefits of an agricultural loan restructuring 
requirement.
---------------------------------------------------------------------------
    \346\ U.S. Department of the Treasury, Frequently Asked Questions 
Regarding the Capital Purchase Program for Small Banks (online at 
www.financialstability.gov/docs/CPP/FAQonCPPforsmallbanks.pdf) 
(accessed July 17, 2009).
    \347\ U.S. Department of the Treasury, FAQs on Capital Purchase 
Program Repayment and Capital Assistance Program (online at 
www.financialstability.gov/docs/FAQ_CPP-CAP.pdf) (accessed July 17, 
2009).
---------------------------------------------------------------------------

d. Effect on farm credit availability

    Policymakers must also consider the potential impact of a 
restructuring mandate for TARP recipient banks on farm credit 
availability. Commercial banks are for-profit businesses; 
therefore, any mandate affecting their cost of doing business 
will likely have some influence on their lending decisions. 
Unlike FSA and FCS, commercial banks have no exclusive mandate 
to serve farm markets. Should banks perceive the cost of 
providing farm loans as too high, they are free to shift their 
resources to other markets.
    Lenders, particularly large lenders for whom agricultural 
lending is a small piece of their portfolios, may simply exit 
the farm credit market if the cost of doing business becomes 
too onerous. Yet, while farm loans may be a small percentage of 
their portfolio, large banks are an important source of farm 
loans, providing 36 percent of commercial bank farm credit. The 
loss of a large lender could diminish farm credit availability.
    When a commercial bank withdraws from the local farm credit 
market, the results can be quite harsh, as demonstrated by New 
Frontier Bank in Greeley, CO. The absence of this commercial 
bank farm credit provider has left a dearth of farm credit. 
There is not sufficient credit capacity with the remaining 
credit providers to fill the void quickly or easily.
    The three possible loan restructuring mandate models have 
differing approaches to administrative costs. The Making Home 
Affordable program offers numerous incentives, designed to help 
offset the administrative costs of a restructuring. By 
contrast, the FSA and FCS models would leave the administrative 
costs with the banks, possibly to be passed through to the 
borrowers.

e. Benefits to the taxpayer

    Finally, Congress may also consider taxpayer fairness in 
determining the use of a loan restructuring requirement, and 
whether TARP-recipient banks that lend to agriculture should 
have to conform to the practices of other federally subsidized 
agricultural lenders. FSA is a government agency and is 
directly subsidized by the federal government. FCS is a quasi-
government entity or GSE that is also subsidized by the federal 
government, albeit to a lesser extent. Both are lenders of 
agricultural loans and both have a loan restructuring 
requirement. Comparatively, a commercial bank that is a 
recipient of billions of dollars in TARP funds is also 
subsidized by the federal government. However, taxpayers, who 
are providing the funding for TARP, do not enjoy the option of 
a loan restructuring requirement from TARP-recipient banks like 
they enjoy from FSA and FCS.

                             E. Conclusion

    Unlike many other sectors, over the last few years farm 
lending has featured positive signs, both for borrowers and 
lenders. The agriculture sector posted record profits and had 
historically low debt to asset ratios. Farm loan delinquency 
rates were also at historic lows. Even as farm news has been 
generally positive in recent years, the news has not been 
universally good. Some sectors, such as dairy, have faced tough 
economic times brought on by high input costs and low milk 
prices.
    It now appears that some of the stresses in the rest of the 
economy may be catching up to the farm sector. While still 
within historic averages, recent quarters have revealed deeply 
worrisome trends. Credit availability appears to be tightening, 
and demand for loans from USDA, the lender of last resort, has 
increased notably. Lenders have reported a steady rise in loan 
delinquencies and charge-offs. Of particular concern is the 
projection that farm income will fall by 20 percent this year 
and that farm families have an increasing reliance on non-farm 
income.
    Unfortunately, farm credit data are incomplete. While the 
available data reveal some troubling trends, the existing data 
make it extremely difficult to predict the potential length and 
depth of these trends with any certainty. Without definitive 
data, it is difficult to draw definitive conclusions or to make 
definitive recommendations at this time. Thus, the Panel's 
first recommendation is that all available data should be 
closely monitored going forward. It is critical to track the 
direction of these trends.
    As noted in the Panel's March report on residential 
mortgage foreclosure mitigation, in order for Congress and 
regulators to respond properly and promptly to issues in the 
market, better information is needed. Congress should create a 
farm loan performance reporting requirement to provide a source 
of comprehensive intelligence about loan performance, loss 
mitigation efforts and foreclosure. Banking regulators, USDA, 
and FCS could be required to analyze these data and to make the 
data and their analysis public. To the extent that lenders 
already report delinquency and foreclosure data to credit 
reporting bureaus, the additional cost of federal reporting 
would be quite modest, but the better information could be very 
valuable both in identifying problems and in working out policy 
responses.
    It is possible that the current negative economic trends in 
agriculture may level out or even reverse. In its ten-year 
projection released in February 2009, USDA projected that net 
farm income would decline in the near term from the high levels 
of 2007 and 2008, but remain historically strong and rebound to 
near record levels by the end of the projections (2018).\348\ 
Like all projections, however, this is based on critical long-
term assumptions based on a number of factors. If the situation 
in the farm sector improves, Congress could determine that no 
action to mitigate farm loan foreclosures is necessary. On the 
other hand, it is possible that current trends may continue or 
even worsen. If the situation deteriorates, Congress has a 
range of possible responses:
---------------------------------------------------------------------------
    \348\ USDA Long-Term Projections, supra note 16.
---------------------------------------------------------------------------
    One possibility, and the topic of this report, is a farm 
loan restructuring mandate for TARP recipient banks. Congress 
could impose a restructuring mandate on TARP banks, following 
the pattern of the obligations imposed on lenders by FSA, FCS, 
or the Making Home Affordable program. Each model offers one 
possible means to require restructuring, but would require some 
amount of adaptation to fit the TARP recipient banks' loan 
model.
    While it is an option, mandatory modifications might not be 
the most effective policy choice because of the limited number 
of farm loans held by TARP recipient banks. Commercial banks 
hold only 45.42 percent of overall farm debt. When considering 
real estate debt, the form of debt most likely to be 
collateralized by real estate, commercial banks hold an even 
smaller piece of total farm debt, only 37.67 percent. Further, 
TARP recipient banks only hold 27.46 percent of the commercial 
bank portion of total farm real estate bank loans or ten 
percent of all farm debt. Thus, a restructuring mandate for 
TARP recipient banks would have limited reach. Over time, TARP 
recipient banks are likely to play a diminishing role in the 
farm credit arena as banks continue to return their TARP 
funding to the government. Already, banks holding 2.54 percent 
of total commercial farm bank debt have returned their TARP 
funding.\349\ With Wells Fargo, the nation's largest 
agricultural lender, seeking to return its TARP dollars at the 
``earliest practicable date,'' the share of farm loans held by 
TARP institutions is likely to dwindle further.\350\
---------------------------------------------------------------------------
    \349\ FDIC First Quarter Call Report Data, supra note 149; TARP 
Transactions Report, supra note 156.
    \350\ Tom Petruno, Wells Fargo Says It Will Hold on to TARP Money 
for Now (June 9, 2009) (online at latimesblogs.latimes.com/money_co/
2009/06/wells-fargo-co-didnt-want-a-federal-capital-infusion-last-fall-
but-got-one-anyway-now-despite-its-earlier-objection.html).
---------------------------------------------------------------------------
    Congress and Treasury have other options within TARP to 
protect farm homes, just as they have embraced the principle of 
using TARP to protect non-farm homes. They could apply this 
principle in different ways. One possibility would be to devote 
some portion of the remaining TARP funding to a farm mortgage 
foreclosure mitigation program, patterned on the incentive-
based program developed to protect homes, but focusing on bank 
participation that extends beyond current TARP recipients. 
Unlike residential mortgage restructurings, farm loan 
restructurings must also consider business plans, cash flows, 
and market factors. Therefore, the model would need to be 
adapted to provide the necessary flexibility. Another option 
for utilizing TARP money is to create a loan guarantee program 
for restructured farm loans. Both FCS and banks have indicated 
that FSA's loan guarantees are important to their ability to 
restructure troubled farm loans, yet the demand for such loans 
nearly always exceeds the supply. TARP could help ensure that 
guarantees are available to help lenders conduct successful 
restructurings.
    If the farm sector continues to decline, Congress has 
options outside the TARP program. The U.S. government has a 
longstanding commitment to farmers. This is embodied through 
the numerous existing programs designed to assist the farm 
industry, many of which are targeted toward different needs or 
sectors. If Congress determines that the farm sector in part or 
in whole needs assistance, then such assistance could be 
delivered through existing programs. While having a potentially 
wider impact than a TARP bank mandate, this alternative could 
also allow assistance to be narrowly targeted, such as to the 
struggling dairy industry.
    While most people now live in cities rather than on a farm 
or ranch and most people earn a living at an office rather than 
in the fields, agriculture remains central to our nation. We 
rely on our nation's farmers and ranchers to provide us with a 
steady, safe food supply. Congress has a long history of acting 
to help maintain a robust agriculture sector while also 
ensuring the survival of the family farm. We offer this 
analysis of the current farm credit situation in that spirit.
                     SECTION TWO: ADDITIONAL VIEWS


                            A. Damon Silvers

    I wish to make the following additional points:
    As is the case in housing, foreclosure is usually a 
mutually destructive option in farm lending. This was confirmed 
in our hearing in Greeley, CO, by witnesses from the banking 
industry and the Farm Credit System.
    In other instances where federal money or guarantees are 
injected into the farm credit system, the Congress has required 
various forms of foreclosure mitigation policies to be adopted 
by lenders.
    It is clearly the policy of the Treasury Department in 
administering TARP to seek to prevent home foreclosures, and 
properly so, given the explicit mandate in the EESA to do so.
    It should be the policy of the Treasury Department to 
administer TARP in such a manner to encourage TARP recipient 
banks to pursue options other than foreclosure in dealing with 
troubled loans to family farmers.

           B. Rep. Jeb Hensarling and Senator John E. Sununu

    Although we commend the Panel and its staff for their 
efforts in producing the Special Report on Farm Loan 
Restructuring under a tight time frame, we do not concur with 
all of the analysis and conclusions presented in the report.
    We do agree with the Panel's conclusion that agriculture is 
a vital part of our nation's economy. However, we think a 
retroactive restructuring mandate would burden TARP recipients 
unduly and amplify the overall risk of extending credit to 
borrowers, causing adverse ripple effects to the farm industry 
it intends to assist.\351\ In addition, such action would send 
the wrong message to the private sector and enhance the 
uncertainty associated with participation in public sector 
programs. The tepid response to the TALF program and the 
protracted start-up period for the PPIP program are 
attributable in part to the concern that private sector 
participants may be subjected to burdensome rules and 
regulations on a retroactive basis. Private sector participants 
have taken a circumspect and guarded approach to public sector 
programs, and the Panel's suggestion that Congress sanction a 
retroactive restructuring mandate for TARP recipients is 
clearly counterproductive.\352\
---------------------------------------------------------------------------
    \351\ In this regard, we refer only to TARP recipients that have 
not repaid all amounts owed to the United States government. It is our 
understanding that no member of the Panel advocates the imposition of 
any restructuring mandate on any TARP recipient that has repaid all 
such amounts.
    \352\ Many recipients have been stigmatized by their association 
with TARP and wish to leave the program as soon as their regulators 
permit.  Some of the adverse consequences that have arisen for TARP 
recipients include, without limitation, executive compensation 
restrictions, corporate governance and conflict of interest issues, 
employee retention difficulties, and the distinct possibility that TARP 
recipients (including those who have repaid all Capital Purchase 
Program advances but have warrants outstanding to Treasury) may be 
subjected to future adverse rules and regulations. In our opinion, the 
TARP program should be terminated due to, among other reasons: (1) the 
clear desire of the American taxpayers for the TARP recipients to repay 
all TARP related investments sooner rather than later; (2) the 
troublesome corporate governance and regulatory conflict of interest 
issues raised by Treasury's ownership of equity interests in the TARP 
recipients; (3) the stigma associated with continued participation in 
the TARP program by the recipients; and (4) the demonstrated ability of 
the current Administration to use the program to promote its economic, 
social, and political agenda. Rep. Hensarling introduced legislation 
(H.R. 2745) to end the TARP program on December 31, 2009. In addition, 
the legislation (1) requires Treasury to accept TARP repayment requests 
from well capitalized banks; (2) requires Treasury to divest its 
warrants in each TARP recipient following the redemption of all 
outstanding TARP-related preferred shares issued by such recipient and 
the payment of all accrued dividends on such preferred shares; (3) 
provides incentives for private banks to repurchase their warrant 
preferred shares from Treasury; and (4) reduces spending authority 
under the TARP program for each dollar repaid.
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    More significantly, we are troubled that the private sector 
must now incorporate the concept of ``political risk'' into its 
due diligence analysis before engaging in any transaction with 
the United States government.\353\ While private sector 
participants are accustomed to operating within a complex legal 
and regulatory environment, many are unfamiliar with the 
emerging trend of public sector participants to bend or 
restructure rules and regulations so as to promote their 
economic, social, and political agenda. The realm of political 
risk is generally reserved for business transactions undertaken 
in developing countries and not interactions between private 
sector participants and the United States government. Private 
sector participants are beginning to view interactions with the 
United States government through the same jaundiced eye they 
are accustomed to directing toward third-world governments. It 
appears somewhat ironic that the Panel champions transparency 
and accountability for the private sector but fails to note 
that retroactive mandates are their public sector antithesis. 
How is it possible for directors and managers of private sector 
enterprises to discharge their fiduciary duties and 
responsibilities when policy makers legislate and regulate 
without respect for precedent and without thoughtfully vetting 
the unintended consequences of their actions?
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    \353\ While scholars have not agreed on a single definition of 
``political risk,'' the term generally refers to the inappropriate 
interference of the public sector in the affairs of the private sector.
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    The business community is sorting through this sea change 
and may appear intimidated by the Administration. The public 
sector should not, however, view the reticence of the private 
sector to challenge the Administration and Congress as 
acquiesce to their policies. Time will tell, but the private 
sector has no doubt learned much from the circuitous and 
unpredictable nature of the TARP, TALF, and PPIP programs, as 
well as from the treatment of the non-UAW creditors in the 
Chrysler and GM bankruptcies.\354\ Any suggestion by the Panel 
that Congress should consider the imposition of a retroactive 
restructuring mandate on TARP recipients is not helpful in 
restoring a sense of confidence between the private and public 
sectors.
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    \354\ It will be interesting to note if the cost of capital of 
business enterprises with large unionized workforces increases after 
the treatment of the private sector secured and unsecured creditors in 
the Chrysler and GM bankruptcies.
         SECTION THREE: ABOUT THE CONGRESSIONAL OVERSIGHT PANEL

    In response to the escalating crisis, on October 3, 2008, 
Congress provided Treasury with the authority to spend $700 
billion to stabilize the U.S. economy, preserve home ownership, 
and promote economic growth. Congress created the Office of 
Financial Stabilization (OFS) within Treasury to implement a 
Troubled Asset Relief Program. At the same time, Congress 
created the Congressional Oversight Panel to ``review the 
current state of financial markets and the regulatory system.'' 
The Panel is empowered to hold hearings, review official data, 
and write reports on actions taken by Treasury and financial 
institutions and their effect on the economy. Through regular 
reports, the Panel must oversee Treasury's actions, assess the 
impact of spending to stabilize the economy, evaluate market 
transparency, ensure effective foreclosure mitigation efforts, 
and guarantee that Treasury's actions are in the best interests 
of the American people. In addition, Congress instructed the 
Panel to produce a special report on regulatory reform that 
analyzes ``the current state of the regulatory system and its 
effectiveness at overseeing the participants in the financial 
system and protecting consumers.'' The Panel issued this report 
in January 2009.
    On November 14, 2008, Senate Majority Leader Harry Reid and 
the Speaker of the House Nancy Pelosi appointed Richard H. 
Neiman, Superintendent of Banks for the State of New York, 
Damon Silvers, Associate General Counsel of the American 
Federation of Labor and Congress of Industrial Organizations 
(AFL-CIO), and Elizabeth Warren, Leo Gottlieb Professor of Law 
at Harvard Law School to the Panel. With the appointment on 
November 19 of Congressman Jeb Hensarling to the Panel by House 
Minority Leader John Boehner, the Panel had a quorum and met 
for the first time on November 26, 2008, electing Professor 
Warren as its chair. On December 16, 2008, Senate Minority 
Leader Mitch McConnell named Senator John E. Sununu to the 
Panel, completing the Panel's membership.

                                  
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