Testimony of Glen Keppy

**Associate Administrator for Programs**

**Farm Service Agency**

**United States Department of Agriculture**

**before the**

## House Committee on Agriculture

## Subcommittee on Conservation, Credit, Rural Development and Research

## United States House of Representatives

### **March 27, 2007**

Mr. Chairman, and members of the committee, thank you for the
opportunity to appear before you to review the current state of Farm
Loan Programs (FLP) at the Department of Agriculture. I am pleased to be
able to share vital administrative and FLP accomplishments by the Farm
Service Agency (FSA) over the past several years. We will provide a
brief overview of our key programs, a comparative analysis of current
trends versus where we were ten years ago, and perspectives of ongoing
implementation challenges we face as we continue to administer FLP.
Finally, we will provide an overview of the recommendations of the
Administration's 2007 farm bill proposals for the Credit title.

**Farm Loan Programs Overview**

FSA makes direct and guaranteed farm ownership (FO) and operating loans
(OL) to family-size farmers and ranchers who cannot obtain commercial
credit from a bank, Farm Credit System, or other lenders (Chart 1). 
FSA loans can be used to purchase land, livestock, equipment, feed,
seed, and supplies.  Our loans can also be used to construct buildings
or make farm improvements.

Under its Farm Ownership and Farm Operating Loan programs, FSA has the
following amounts outstanding:

-   Direct Farm Ownership: \$2.881 billion

-   Guaranteed Farm Ownership: \$5.478 billion

-   Direct Operating Loan: \$2.290 billion

-   Guaranteed Operating Loan: \$3.748 billion

Emergency loans are also available to help producers recover from losses
in counties, and contiguous counties, that are declared or designated as
disaster areas or plant and animal quarantine areas. Other programs
include the Indian Tribal Land Acquisitions Loan Program (ITLAP) and the
Boll Weevil Eradication Loan Program.

FSA loans are often provided to beginning farmers, ranchers and
applicants designated by statute as socially disadvantaged (SDA) who
cannot qualify for conventional loans because they have insufficient
financial resources. FSA also provides temporary assistance to
established farmers who have suffered financial setbacks from natural
disasters, or whose resources are too limited to maintain profitable
farming operations at commercial lending rates and terms.

FSA guaranteed loans provide conventional agricultural lenders with up
to a 95 percent guarantee of the principal and/or interest should the
borrower default. The lender is responsible for servicing a borrower\'s
account for the life of the loan. All loans must meet certain qualifying
criteria to be eligible for guarantees, and FSA has the responsibility
to monitor the lender\'s servicing activities. Farmers first apply to a
conventional lender, which then arranges for the FSA guarantee.

FSA makes and services direct FO and OL loans. We provide direct loan
customers with credit counseling and supervision so they have a better
chance of success in their farming operation. To qualify for a direct
loan, the applicant must meet the eligibility criteria as well as show
sufficient repayment ability and pledge collateral to fully secure the
loan.

**Modernization Trends**

Agriculture is a very dynamic industry. Recent changes in the operating
environment have been enormous. This requires that FSA also must be
aggressive in keeping pace and must modernize our operations.

Briefly, our recent accomplishments include:

*Farm Business Plan.* Business plans for FSA borrowers are now processed
through a Web based system. This provides access to "real time" data on
our portfolio while sharing data among our automated systems. This
system also provides a reporting option. We have established some
standard reports that reveal the financial status of our portfolio. In
the future, we will be developing additional reports that will allow us
to assess the impact of economic changes in the agricultural sector so
that we can anticipate their impact on our borrowers. This also allows
lenders to electronically provide information to FSA on guaranteed
loans. In the future, we expect that borrowers and applicants using this
software will be able to provide their financial information to us via
the Web.

This system has allowed our loan officers to conduct more extensive and
meaningful financial analysis of our borrower's portfolios thus
enhancing their opportunities for success and graduation to commercial
lending. We recently added a new feature that allows our loan officers
to order applicant credit reports from the three major reporting
companies through this system. We expect this to improve the application
processing time.

Currently, we are moving all of our automated systems to the Web. When
this project is completed we will eliminate duplicate data collection
and farm loan services will be delivered more efficiently. Our employees
will be able to conduct USDA business from any location where there is
broadband, WIFI or dial-up Internet access. This will allow us to
conduct business with producers at locations and times convenient to
them. Additionally, this information will be stored on a centralized
server allowing employees to quickly access portfolio information and
provide real time management reports.

Guaranteed Loans are processed under the Guaranteed Loan System (GLS),
an integrated software system shared between USDA's Rural Development
and FSA. GLS has been Web enabled since May 2001, with ongoing
refinements to make it more efficient and user-friendly. Lenders will
soon have access to the system to electronically submit status reports.

*FLP Streamlining.* FLP is in the final stages of streamlining
regulations on its direct loan programs (guaranteed loan regulations
were streamlined in 1999). This streamlining effort will provide FSA
employees with additional time to devote to servicing other customer
needs. Once implemented, it will deliver the following three key
benefits:

1)  Consolidate and reorganize 13 Code of Federal Regulations (CFR)
    parts into five parts and 42 instruction manuals into four
    handbooks;

2)  Modify loan making and servicing processes within current statutory
    authorities; and

3)  Improve, rather than eliminate, existing program processes.

*Farm Loan Programs Risk Assessment (FLPRA).* FSA developed a risk based
oversight program to identify areas for potential risk in our
portfolios. State reviews are conducted by national FLP staff once every
five years and by state office staffs who must review one-third of their
service centers each year. Potential risk areas are separated into three
broad categories:

1)  Program Management;

2)  Program Objectives; and

3)  Financial Integrity.

Data is obtained from the FLP automation sources. This process was
piloted in FY 2005 and implemented in FY 2006. To date, fourteen states
and 187 service centers have been reviewed.

*800-Number.* In February 2006, FSA introduced a new 24-hour, toll-free
line that borrowers can call to get information on their accounts. They
can check their current account status, loan balance, due date of the
next installment, historical data on their various loans, and general
information -- such as the amount of interest paid -- to help them in
calculating their income taxes.

**Comparative Framework: That Was Then -- This Is Now**

The quality of our portfolio has improved significantly due in large
part to our modernization efforts, better customer service and the
dedication of FSA employees, as well as the much improved farm financial
environment of the past seven years.

FLP continues to emphasize the importance of processing applications in
a timely manner. Between FY 2001 and FY 2006, FLP reduced its direct
application processing timeframes by thirteen days (30 percent), and
reduced guaranteed processing timeframes by five days (28 percent).

*Loss Rates.* In FY 2006, losses in the direct loan program fell to
their lowest level since 1986 -- just 2.9 percent. FSA has experienced a
steady decrease in direct losses over the past decade, from a high of 11
percent in FY 1996 (Chart 2).

Losses for FY 2006 in the guaranteed loan program were 0.4 percent, the
lowest level since 1985 (Chart 3).

*Delinquency Rates.* As with losses, the direct loan delinquency rates
are at historic lows for the past two decades at 8.1 percent for FY 2006
(Chart 4). This is the result of steady and dramatic decreases from a
23.8 percent delinquency rate in FY 1995. The decrease was facilitated
by expanded authority, since 1996, to offset federal payments, salaries
and income tax refunds to delinquent borrowers.

In the guaranteed program, the FY 2006 delinquency rate was 1.45
percent, the lowest since 1995 (Chart 5).

*Foreclosures.* Foreclosure rates continue to be very low in the direct
loan program. In 2006, FSA participated in 198 foreclosures, including
cases initiated by other lenders against individuals who also had loans
with FSA. This represents less than one-third of 1 percent of the
agency's direct loan caseload, and is a slight decrease from the
previous two years, when the rate was just over the one-third of 1
percent level.

*Inventory Properties.* Inventory farm properties -- those that have
come into government ownership through voluntary conveyance or
foreclosure -- are also at historic lows with just 100 farms covering
18,000 acres in FY 2006. Just a decade ago, FSA held nearly 1,800 farms
covering 598,000 acres. Many of those inventory properties were sold to
established and beginning farmers, providing those individuals with
prime opportunities to expand or create new operations.

*Graduation Rates.* Federal law requires FSA to "graduate" its borrowers
to commercial credit when they have made sufficient progress to be able
to qualify for loans from other lenders. They are assisted by the agency
in refinancing their direct loans with FSA guaranteed loans from
commercial lenders. Some 2,824 direct loan borrowers (3.83 percent) were
able to graduate in FY 2006, a percentage comparable to the rates over
the past ten years.

*Beginning and SDA Farmer Participation.* FSA has annual performance
goals in place for field offices that reflect the Government Performance
and Results Act requirements. These goals include increasing lending to
beginning and SDA farmers and ranchers.

FSA continues to provide assistance to minority farmers in greater
proportions than their demographic percentage of the total farming
population (Chart 6 / Table 1).

FSA has increased the amount of loan funds obligated to beginning
farmers and ranchers and to SDA applicants. The FSA direct loan
beginning farmer caseload increased from 3,474 in 1995 to 16,828 in
2006. During this same period the FSA direct SDA caseload increased from
3,260 to 14,327. Guaranteed caseloads for beginning farmers and ranchers
and SDAs were first reported in 1997. The FSA guaranteed beginning
farmer caseload increased from 3,617 in 1997 to 8,236 in 2006. During
this same period, the FSA guaranteed SDA caseload increased from 1,730
to 3,014.

**Independent Study Results**

Now, these improvements just cited are not our only assessments.
Independent research verifies that FSA direct loan programs are
operating effectively, and make a significant, positive impact on the
groups they are intended to serve. Researchers at the University of
Arkansas recently conducted a comprehensive review of FSA direct loan
programs. In one facet of their research, they studied loan originations
in fiscal years 2000-2003 and found that 92 percent of the direct loans
originated in those years went to small farmers, that is, farmers with
less than \$250,000 in gross sales. They found that although FSA farm
loans assist only 4 percent of all farmers, because FSA farm loans are
targeted to family farmers, an estimated 18 percent of all non-hobby
family farmers depend on FSA for at least a portion of their financing.

The researchers also examined longer term outcomes of FSA's FLP. They
reviewed the status of farmers who received loans between 1994 and 1996.
The research found that 78 percent of the loans made during that period
have been satisfied. They also found that of all the loan recipients
during that period, only 11 percent left farming involuntarily. Bear in
mind that all of these farmers cannot get commercial financing when they
come to FSA for a direct loan.

In one key finding, the researcher concluded that the direct FLPs are
largely servicing the intended clientele based on the agency's mission,
given that direct loan recipients typically have weakness in their
financial profiles and would likely have difficulty qualifying for
commercial credit. Study findings, and other indicators in this
testimony, clearly show that FSA's FLPs are doing a remarkable job of
accomplishing what can only be described as challenging program
objectives, as well as controlling operating costs and losses.

**Ongoing Challenges**

As we look ahead in the ever-changing environment, FSA will face
significant and ongoing challenges in the years to come. Some of the
most prominent are term limits, loan limits, staffing constraints, and
finding ways to help beginning farmers overcome the barriers to enter
production agriculture.

*Term Limits.* The statute presently limits a borrower to direct OL
loans in each of seven years, with an additional one-time, two-year
waiver on an individual case basis:

> ■ There are more than 7,000 FSA borrowers who can only receive direct
> operating loan assistance one more year from the agency; and
>
> ■ There are more than 11,000 FSA borrowers who can only receive direct
> operating loan assistance two more years from the agency.

Without FSA direct loan assistance, many of these borrowers may be
forced out of farming as they may not have access to the capital
necessary for them to conduct their farming operations.

The statute presently limits borrowers with guaranteed OL loans to 15
years of eligibility, with receipt of a direct OL loan also counting as
a year of eligibility for guaranteed OL loans. The 2002 Farm Bill
suspended enforcement of this provision through December 31, 2006, but
Congress recently extended the suspension through September 30, 2007.
Once the statutory suspension expires, more than 3,800 borrowers are
ineligible for any further assistance. An additional 1,600 borrowers
will become ineligible for further assistance after 2007.

*Staffing Challenges.* We estimate that as many as 26 percent of FSA's
current loan officers will be eligible to retire by the year 2009.

On average, it requires about two years to hire and train a loan officer
in order to provide the level of effective supervision, expertise and
customer service needed to maximize every opportunity for success for
FSA borrowers. The two year training window for new loan officers
complicates an already cloudy staffing forecast.

FSA's portfolio and borrowers could be exposed to financial risk if
retirement attrition projections for loan officers are even marginally
accurate. A large percentage of FSA borrowers are either beginning
farmers or financially stressed borrowers who need financial
supervision. FSA loan officers provide this supervised credit which
requires a complete knowledge of FSA programs, finances, and agriculture
enterprises.

**2007 Farm Bill**

The unique features of FSA farm loan programs have made them a key
resource for beginning and socially disadvantaged farmers for many
years. The Administration's farm bill proposals for the Credit title
will enhance the ability of farm loan programs to meet the special needs
of beginning and socially disadvantaged farmers and ranchers. Several
obstacles make it difficult for these two groups to launch production
agriculture operations. There are several underlying factors that create
barriers, including:

1)  Initial capital investment;

2)  High land values;

3)  Inability to access credit;

4)  Lack of farm succession planning;

5)  Increasing interest rates; and

6)  Higher energy costs.

The farm bill proposals will make farm loan programs even more useful in
overcoming these barriers and help these farmers and ranchers become
established and financially secure.

The specific provisions are:

*Targeted funding*. We recommend increasing the statutory target for
direct OL funds for beginning and SDA farmers to 70 percent.
Additionally, we propose increasing the direct FO target for beginning
and SDA farmers to 100 percent. Increasing the target levels would
provide additional assurance that beginning and SDA farmers have
financing options to purchase farmland and then operate those farms. We
also recommend changes to the timing and method of pooling funds to
assure that the funds may be used to meet the needs of these applicants
nationwide.

*Beginning Farmer Downpayment Loan Program*. Our proposal would enhance
the existing Beginning Farmer and Rancher Downpayment Loan Program to
increase the opportunities for the next generation of farmers. The
proposal would reduce the existing four percent interest rate to two
percent. The first annual payment would be deferred for one year. The
\$250,000 cap on the value of property that may be acquired would be
eliminated, and the minimum producer contribution would be reduced from
10 percent of the property purchase price to five percent. In addition,
the program would be expanded to include socially disadvantaged farmers
and ranchers as eligible applicants. These changes would make the
program a better fit for the situations that confront beginning and
socially disadvantaged farmers.

*Loan Limits.* The maximum amount an individual may receive in FSA Farm
Loan Programs is specifically prescribed in the Consolidated Farm and
Rural Development Act (CONACT). The CONACT direct operating loan limits
have not changed since 1984; the current limit is \$200,000. Direct FO
loan limits were increased to the current \$200,000 level in 1978.

The maximum direct loan amounts specified in the CONACT have not kept
pace with increases in the cost of farm land and production inputs. We
propose to increase the existing limits of \$200,000 for direct FO and
\$200,000 for direct operating loans to a maximum of \$500,000 for any
combination of the two loan types. The higher, combined limit will allow
a better matching of loan type, amount, and purpose to an individual
applicant's credit needs.

We believe these three proposals will improve access to capital,
providing more opportunities for and improving the competitiveness of
beginning and socially disadvantaged farmers.

**Conclusions**

Through modernization efforts, maintaining focus on program objectives,
and the hard work and dedication of FSA employees, FSA farm loan
programs has made great strides in improving program performance. Loan
failures and losses have declined which is a strong indication that the
program mission of helping farmers become successful is being
accomplished. At the same time, increased assistance to small,
beginning, and minority farmers, reflects remarkable success as well.

However, more challenges lie ahead. Government resources are
increasingly limited and the agriculture production landscape is
changing. The structure of agriculture continues to change as most farms
become larger and increasingly more reliant on technology, resulting in
increased capital needed to gain entry. The cost of assets required to
operate a farm continue to increase as well. These changes pose
significant barriers and challenges to the groups that FSA farm loan
programs are intended to assist. These issues create major challenges
for the agency as well, since the success of the program depends on
those whom the programs are intended to serve. To keep pace with these
changes, we will continue efforts to modernize the delivery system, and
to refine and adjust program requirements and operations to maximize the
opportunities for our nation's small, beginning, and socially
disadvantaged farmers and ranchers.

Because of our rural delivery system and experienced loan officers, the
FSA farm loan programs staff is well positioned to continue the high
quality delivery of existing programs and new initiatives to assist
small, beginning, and minority family farmers. We look forward to
working with this Committee to address the challenges we face in
accomplishing this worthwhile mission to strengthen family farmers and
rural America.

**APPENDIX**

**Chart 1**

![](media/image1.wmf)

*\$ Billions*

**Chart 2**

![](media/image2.wmf)

**Chart 3**

![](media/image3.wmf)

**Chart 4**

![](media/image4.wmf)

**Chart 5**

![](media/image5.wmf)

**Chart 6**

![](media/image6.wmf)

*Percentage of Obligations to Total Obligations*

**Chart 6 / Table 1**

![](media/image7.jpeg){width="5.129861111111111in"
height="3.8472222222222223in"}