## Testimony of

## W. Jeff Greenlee

## On Behalf of the

AMERICAN **BANKERS** ASSOCIATION

*Before The*

United States House of Representatives

Committee on Agriculture

Subcommittee on Conservation, Credit, Energy, and Research

March 27, 2007

## Testimony of

## W. Jeff Greenlee

## On Behalf of the

## AMERICAN **BANKERS** ASSOCIATION

## Before The

## United States House of Representatives

## Committee on Agriculture

## Subcommittee on Conservation, Credit, Energy, and Research

## March 27, 2007

Mr. Chairman and members of the committee I am pleased to be here today
representing the American Bankers Association (ABA) to discuss the
availability of credit in rural America.

My name is Jeff Greenlee and I am President of NBanC in Altus, Oklahoma.
NBanC, also known as NBC Bank, is a community bank chartered in Tulsa,
OK, with banks located in Tulsa, Altus, Enid, and Kingfisher, Oklahoma.
NBC is a member of NBC Corp. of Oklahoma, a bank holding company which
also owns a separately chartered bank: NBC, Oklahoma City.

I serve as president of the Altus, Oklahoma location of NBC. The Altus
bank has total loans of \$37 million of which thirty-five percent are
agricultural. The population of Altus is approximately 20,000 people,
and much of the rest of our loan portfolio is somehow related to
financing rural businesses and rural consumers. I also serve as the Vice
Chairman of the American Bankers Association's Agricultural and Rural
Bankers Committee.

ABA, on behalf of the more than two million men and women who work in
the nation's banks, brings together all categories of banking
institutions to best represent the interests of this rapidly changing
industry.  Its membership -- which includes community, regional and
money center banks and holding companies, as well as savings
associations, trust companies and savings banks -- makes ABA the largest
banking trade association in the country.

![](media/image1.wmf)**Banks Provide the Credit That Drives the Rural
Economy**

I am pleased to report to you that the banking industry in the United
States with 8,681 banks and

savings institutions operates nearly 22,000 banking offices in rural and
small town America. The rural and small town presence our industry
provides guarantees that rural Americans have the same access to
financial products and services that urban Americans enjoy. To give you
an example of the scale of what the banking industry manages in rural
America, consider the fact that rural and small town

deposits in banks are estimated to be around \$720 billion.

In the area of agricultural production and agricultural real estate
finance, the banking industry had \$106.9 billion loaned to America's
farmers and ranchers at the end of 2006. This is the most credit banks
have ever had outstanding to farmers and ranchers in the history of our
country.

I am pleased to report to you that the agricultural loan portfolio is
performing very well. The willingness of the banking industry to lend to
this sector continues to be robust, and the availability of choices
producers have to select from numerous competitive offers to finance
their operations has never been higher.

![](media/image2.wmf)

People from other countries often visit our banks to learn more about
how well the private sector handles the credit demands of agriculture
and rural America. Many times they come from countries that have tried
numerous experiments with government backed lenders of one type or
another, and in every case they come away with a keen appreciation of
the value of our privately capitalized, non-government financial
institutions.

I report this information to you not to brag about what we have achieved
as an industry, but to point out to you that our system is unique,
efficient, and is the result of over 200 years of positive and negative
experience. We have a unique and enviable system of agricultural and
rural banking in this country, and it is a system that should be
carefully cultivated so it continues to grow and flourish.

Congress deserves some of the credit for what we have achieved in
financing rural America too, since federal agricultural policy has, for
more than 70 years, provided farmers and ranchers with the safety net
they need to be able to withstand the vagaries of weather,
globalization, economic setbacks, and other uncontrollable factors.
Bankers, who understand how these complex programs work, have the
certainty they need to be able to forecast loan repayment, a critical
factor in the credit making process. This certainty in being able to
forecast repayment, along with stable asset values and knowledge of
agriculture by the bankers who do the lending, is why the banking
industry provides forty percent of all agricultural credit, making the
banking industry the largest supplier of credit to American agriculture.

By providing the safety net that supports agriculture, Congress
strengthens the ability of farmers and ranchers to obtain the credit
they need. Farmers and ranchers benefit greatly from this, as do the
rural communities they live in, because they purchase their inputs from
the retailers in those communities, they send their kids to school
there, and they shop on Main Street.

Federal energy policy has further contributed to the exciting economic
activity taking place today as rural America is seen as our nation's
greatest hedge against dependence on foreign oil. The banking industry
has been an early and active participant in the development of the
biofuels industry, and in the development and commercialization of other
sources of renewable energy such as wind power.

Rural America, with unlimited resources to be tapped to help our nation
meet the challenges of energy production in the future, is an exciting
place to live and bank these days, and I am confident that the banking
industry has the resources to meet the future financial needs of rural
America as we retool to become a producer of food *and* energy.

**The Role of Government Backed Lenders in Rural America**

No discussion on the availability of credit in rural America could be
complete without an examination of the role played by government backed
lenders. Ninety years ago, Congress created the Farm Credit System (Farm
Credit, FCS, or System), a government backed retail lender that enjoys
considerable tax advantages (an effective combined state and federal tax
rate of 3.4 percent in 2006 [^1]), which further relies on taxpayers who
"loan" the FCS their credit rating so FCS can borrow lendable funds in
the government sponsored bond market at very advantageous rates.
Further, when the Farm Credit System collapsed in 1987 it received a \$4
billion line of credit from the Treasury.

The other government backed lender that we have had experiences with
since the founding of our country has been the government itself.
Following the farm debt crisis of the 1980s, the experience USDA had as
a direct lender was very costly to the federal treasury. Since that
time, USDA has transitioned from being a direct lender to farmers and
ranchers to a provider of credit guarantees to banks who then use their
capital and expertise to lend to farmers and ranchers. That transition
has been positive. Later in my testimony I have some specific
recommendations for you to consider that would further improve the USDA,
Farm Service Agency guaranteed farm loan program.

**The Farm Credit System is a Government Backed Lender That Wishes to
Lend Anywhere But the Farm**

For over a year, the Farm Credit System has publicized its Horizons
Project. FCS has touted how it assembled all of the stake holders in
rural America to solicit opinions about what the FCS should do next.
First and foremost, I wish to point out to you that no representative of
the Farm Credit System ever consulted with the American Bankers
Association, or to my knowledge, with any banker in the country. As you
listen to their story about all of the people they consulted, please
know that the banking industry was not invited to participate in their
project. The Horizons Project is really just about expanding the System.
It is not sound policy, and it would set the FCS on a path that would
take them further than they are today from financing agricultural
producers.

Secondly, it is important to know that this is not about giving the Farm
Credit System additional authorities to make more credit available to
farmers and ranchers, since FCS has ample authority provided by Congress
that allows them to offer farmers and ranchers every possible credit
opportunity.

Third, in order to fully appreciate where the FCS wants to land next, it
is important that we examine what the Farm Credit System is today;
because that will give you an indication of what kinds of deals they
will want to do in the future.

The following information was gleaned from the *2006 Annual Information
Statement* issued by the Federal Farm Credit Banks Funding Corporation:

-   Net income in 2006 was \$2.46 billion

-   Farm Credit had an effective combined state and federal tax rate
    that amounted to just 3.4 percent of net income

-   FCS had \$123.4 billion in loans outstanding at the end of 2006, and
    total assets of \$162.9 billion

-   Between 2005 and 2006 loans grew at a 16.2 percent rate, which is
    considered to be rapid growth by federal banking regulators \-\-- in
    fact, FCA warned System institutions about "significant asset growth
    that may contribute to increased risk..." in an informational memo
    issued to all System institutions on February 9, 2007.

-   58 percent of FCS lending in 2006 was in loans over \$500,000

-   24 percent of FCS lending in 2006 was in loans over \$5 million

-   \$18.5 billion of FCS bank and association capital on12-31-06 was
    unallocated surplus, meaning it is capital within the FCS that has
    no clear ownership, which is a curious condition for an institution
    that claims to be "borrower owned." Just 16 percent of all Farm
    Credit bank and association capital is clearly allocated to the
    "farmer-borrowers."

Clearly, FCS is a large, fast growing institution with a concentration
of its credit to large borrowers. In fact, the average FCS institution
is 13 times larger than banks the Federal Deposit Insurance Corporation
defines as an "Ag Bank."

**What is the Farm Credit System's Horizons Effort Really About?**

Farm Credit is seeking expanded authorities from Congress and from their
regulator. The recommendations in the Horizons report, the proposed
legislative language they have just released, and the proposed rules
they have convinced their regulator to issue all point to the fact that
Farm Credit wishes to become a large scale commercial lender to big
businesses, and to finance suburban housing and consumers who have
little or no relationship to agriculture or to rural America.

Farm Credit System lenders have, for decades, had the authority to
finance farmer owned businesses that provide services directly related
to a producer's on-farm operating needs. Initially it was understood
that these "farm related" businesses were limited to custom combining,
hoof trimming, on-farm cattle de-lousing, and other similar services
delivered to producers on their farms. Over time, FCS lenders have
looked increasingly at the commercial lending space and have desired to
expand into more and more business financing that is, at best,
marginally related to agriculture.

This has, in recent years, led to FCS loans to businesses such as luxury
pet hotels, trucking companies, restaurants, tourist destinations, golf
courses, duck camps and other types of businesses that do not fit the
mission established by Congress.

We have closely monitored these developments over the years and we have
voiced our concerns to the federal regulator of the FCS, and yet these
instances of questionable lending continue to crop up.

![](media/image3.wmf)

**FCS Desires Major Expansion into Corporate Finance**

It is clear from the legislative language that Farm Credit has released
that they seek to circumvent their mission of financing businesses that
provide for the "on-farm operating needs" of farmers and ranchers in
order to shift their attention and resources to any business that
processes, markets, handles, purchases, tests, grades, distributes, or
markets farm or aquatic goods. In addition, they seek to finance, for
the first time, businesses that provide capital goods or equipment to
farmers or to those *who may qualify under FCA regulations to be defined
as farmers*.

Further, FCS proposes to create a new class of borrower, the
Agribusiness. The language that FCS has released creates a new class of
borrower who would be eligible to borrow from the associations, the Farm
Credit Banks, and from CoBank. The new Agribusiness borrower would not
have to be a farmer-owned business or a farmer-owned cooperative to be
able to borrow from any Farm Credit institution. The Agribusiness
borrower would not have any requirement that product thru-put be owned
by farmers or ranchers, nor is there any restriction that limits the
scope of the businesses other than qualifier that the business is
"primarily engaged" in providing a wide range of [services]{.underline}
and [goods]{.underline} to those who meet FCA's regulatory definition of
a farmer, rancher or harvester of aquatic products. The term "primarily
engaged" would be defined later by the regulator. Our experience with
the regulatory process at the Farm Credit Administration is that they
will seek the broadest possible definition of who is "primarily engaged"
as they work to enable FCS institutions to engage in all kinds of new
financing activities.

Creating the Agribusiness borrower may seem to be fairly innocuous until
you consider the vast range of businesses that process, market, handle,
purchase, test, grade, distribute, or market farm or aquatic goods or
that provide capital goods and equipment to farmers, or those *who may
qualify under FCA regulations to be defined as farmers*. Suddenly FCS
entities would be eligible to finance very large corporate entities such
as equipment manufacturers or floor plan dealer inventory.

What FCS is seeking is a major expansion and it raises a public policy
question\-- what does Congress want the Farm Credit System do?

**FCS Desires Major Expansion into Urban Home Lending**

One of the positive aspects of the American economy is the opportunity
for a majority of its citizens to acquire financing for a home. Home
mortgage financing is efficient, competitive, and widely distributed
among all Americans. The Farm Credit System recognizes that home lending
is a profitable business to be in, and they are seeking to expand their
current authority to finance homes in towns of 2,500 or less to cities
of up to 50,000 people. There is no justification for such action.

I can tell you that in Oklahoma, rural America is not in cities of
50,000. What FCS is proposing would enable them to engage more fully in
financing homes for retirees, second homes for urban residents, and
developing subdivisions. What public policy mission would be fulfilled
by allowing FCS lenders to finance homes in cities with up to 50,000
people?

**FCS Wants to Dilute Farmer Ownership of the Farm Credit System in
Order to Pursue Consumer Lending**

Finally, FCS is suggesting to Congress that the basic ownership
structure of the System be rendered irrelevant. Farm Credit was created
90 years ago as a *farmer-owned and farmer-controlled cooperative*.

Today, in order to borrow from a Farm Credit System lender, borrowers
must buy \$1,000 of FCS stock, or purchase stock equal to two percent of
the loan (2 percent), *whichever is less*. This is a low threshold for
FCS borrowers to meet. More importantly, ownership of some FCS stock
helps to remind FCS borrowers that FCS is a cooperative organization
which follows certain cooperative guidelines and accepts cooperative
governance. In exchange, FCS benefits from various special provisions of
law Congress enacted for cooperatives.

Now FCS lenders are trying to convince Congress to remove the stock
ownership requirement from statute and to allow the "local" boards of
directors of each FCS institution to determine how much stock each
borrower is required to buy. Such action will result in a future FCS
that is "owned" by one favored class of borrower while others who borrow
would be barred from voting, or from receiving other benefits of
cooperative membership. This will only increase the questions that
already surround the ownership of the \$18.5 billion in unallocated
capital that was on the books of FCS institutions at year end 2006.

**ABA Strongly Opposes Expansion of the Farm Credit System**

We urge Congress to reject Farm Credit's expansion plan. The banking
industry, along with other private sector lenders, is financing rural
America today and has more than enough capacity to meet rural America's
needs in the future. The Farm Credit System was created to serve the
credit needs of farmers, ranchers, rural home owners, farmer-owned
service businesses, and farmer-owned cooperatives. They should not be
allowed to abandon their mission to serve these borrowers while
retaining the tax, regulatory, and other special provisions of law that
now apply to them.

**The USDA, Farm Service Agency Guaranteed Farm Loan Programs are an
Example of How Government Backed Credit Programs Should Work**

I am pleased to report to you that the relationship between the banking
industry and FSA is strong and that we are all working together to
provide credit to farmers and ranchers who would not be able to get
credit without the guaranteed loan program. Thanks to the determination
of my peers around the country, and the willingness of FSA to constantly
make adjustments and improvements to their programs, the FSA guaranteed
farm loan programs enabled 46,000 farmers and ranchers to have 62,500
loans with an outstanding principal balance of \$8.9 billion at the end
of FY 05.

Every year approximately \$2.2 billion of new credit is advanced under
the FSA guaranteed loan program, in the form of approximately 10,300 new
loans. Loans are made to purchase and improve farm real estate, build
new farm buildings, make conservation improvements, purchase machinery,
livestock, and crop inputs, and refinance debt.

![](media/image4.wmf)The credit made available under these programs is
going to modest sized farms and ranches as the average guaranteed loan
in FY 05 was \$212,000. Twenty-six percent of all FSA guaranteed loans
made in FY 05 went to farmers and ranchers who FSA defines as beginning
farmers, and nearly twelve percent of all guaranteed loans were made to
farmers and ranchers who FSA classifies as socially disadvantaged
farmers. These loans are made for purposes that we all agree are
"agricultural".

**The Transition from Direct USDA Lending to Credit Guarantees Has Gone
Well**

For the last 30 years Congress and succeeding administrations have
supported the transition from direct USDA loans to providing credit
guarantees to private sector lenders (and government backed lenders like
the Farm Credit System). Private sector lenders do a better job of
underwriting and servicing agricultural credits, and FSA's role is to
oversee the lenders. In addition, instead of hiring a large field staff
to administer a direct loan portfolio, the guaranteed loan programs
leverage the assets of the commercial lenders to do the field work.
However, guaranteed loans do not work for every farmer and rancher. Even
with a 90 percent guarantee against potential loan losses, not all
producers can qualify for this type of credit. Congress and succeeding
administrations have continued to fund a direct loan program to meet the
needs of these very limited resource farmers.

**Banks Make the Most Guaranteed Loans**

I am pleased to report to you that banks make more loans under the FSA
guaranteed loan programs than anyone else. Today, there are 3,222
lenders that participate and of that

number, 93 percent or 2,987 are banks.

**FSA Guaranteed Loan Losses Have Been Very Modest**

Considering the fact that FSA guaranteed loans are made to those farmers
and ranchers who have some sort of credit deficiency, the losses
incurred under the program have been very modest and have been
comparable to non guaranteed lending by banks and other lenders. This is
a great success story that does not get told enough. Loan losses are low
because banks make the initial credit decision, and are responsible for
servicing the loan from cradle to grave. In addition, private sector
lenders know that FSA will not pay on the guarantee until the lender
liquidates and accounts for all of the collateral that was pledged for
the loan. Private lenders must strictly adhere to FSA policies and
procedures in order to ensure that the guarantee will be honored in case
of a loan loss.

Any bank that has had experience with guaranteed loan liquidations knows
that FSA is very thorough in their settlement procedures. Over the
years, led by the American Bankers Association, the banking industry has
worked closely with FSA to ensure that bankers understand the unique
responsibilities that come with the credit guarantee.

**Recommendations for the USDA, FSA Guaranteed Loan Program to be
included in the Next Farm Bill**

**ABA Requests Level Funding for the USDA, FSA Guaranteed Loan
Programs**

**Recommendation:**

We request level funding for the FSA guaranteed loan program, at a level
that would allow annual guaranteed loan making in the \$2.5 to \$3.0
billion range, which is consistent with annual demand over the past few
years. In addition, we support permanent legislative language that would
prohibit USDA from raising fees without Congressional authorization.

**Use of the Term "Average Agricultural Loan Customer Interest Rate"
Should be Abandoned**

Banks and other lenders that make loans using FSA guarantees are
supposed to price guaranteed loans based on a concept that is impossible
to define. Due to the inability of anyone to objectively define the
concept, banks that make guaranteed loans have been exposed to increased
lender liability. For example, last year a small bank in Oklahoma was
forced to pay \$2.127 million to settle a lawsuit based on the claim
that the bank charged the customer an interest rate that was higher than
the "average agricultural loan customer rate."

The statute authorizing the guaranteed loan program, for loans sold into
the secondary market (7 USC Sec. 1929(h) (2)), states the following:

> \"the interest rate payable by a borrower on the portion of a
> guaranteed loan that is sold to the
>
> secondary market under this chapter may be lower than the interest
> rate charged on the portion
>
> retained by the lender, but shall not exceed the average interest rate
> charged by the lender on
>
> loans made to farm and ranch borrowers.\" 

The Farm Service Agency has taken this definition from the federal
statute and has applied it to all FSA guaranteed loans. FSA's handbook,
"Guaranteed Loan Making and Servicing" (2-FLP) requires that each lender
comply with the following:

> " Neither the interest rate on the guaranteed portion nor the
> unguaranteed portion may exceed
>
> the rate the lender charges its average agricultural loan customer."

We do not believe that FSA has done an adequate job of objectively
defining "average agricultural loan customer" because they do not know
what it is. Is that an average rate on all loans that are currently
outstanding at a particular institution?  Is it on loans of the same
duration?  Is it for all types of loans made to anyone who is a farmer
or rancher?  The statute is unclear, and FSA's regulation is equally
problematic.  Essentially both the statute and the regulation attempt to
define what cannot be clearly and objectively defined.

Market forces should determine the rate of interest charged on loans
guaranteed by FSA just as market forces determine the interest rate
charged on all other financial products offered by banks.  The
agricultural credit marketplace is very competitive. The Internet has
created a great deal of transparency about interest rates, loan terms,
and collateral requirements. The marketplace is transparent. Attempts to
impose an artificial cap on interest rates have backfired. Instead of it
being a protection to the borrower, it has exposed the lending community
to additional lender liability, resulting in a reduction in the number
of banks and other lenders that are willing to use the program. The net
result will be that fewer farmers and ranchers will get the credit they
need. The small bank in Oklahoma I spoke about earlier will no longer
use the program.

**Recommendation:** The provision in statute should be repealed, and FSA
should eliminate all references to pricing from their regulation. 
Market forces should determine the price of credit. As the regulations
currently stand, any bank that writes a guaranteed loan is exposed to
additional lender liability because no one can consistently define who
is an average agricultural loan customer. The statute and the regulation
does not protect borrowers. Instead of making more credit available,
more lenders will not use the program.

**The Resumption of Borrower Term Limits Will Represent a Significant
Obstacle to Credit Access for Farmers and Ranchers**

In the mid 1990s, Congress sought to limit the amount of time that a
borrower would be eligible for either direct or guaranteed credit from
FSA. *The Farm Security & Rural Investment Act of 2002* suspended what
is commonly referred to as borrower term limits. ABA supported the
suspension. When the legislation expires on September 30, 2007, term
limits will again take effect and the result could be devastating to
those farmers and ranchers who still need the additional support that an
FSA guarantee provides them in meeting their credit needs.

While we strongly support the idea that all farm and ranch businesses
should be able to stand entirely on the strength of their individual
balance sheet and earnings statements, we recognize the reality that
there will always be a number of farms and ranches who will require some
type of credit enhancement in order to continue to fund their
operations. Requiring these firms to meet an arbitrary deadline for
eligibility is inconsistent with the program.

**Recommendation:** Language imposing borrower term limits on FSA direct
and guaranteed loans should be repealed.

**The Family Farm Definition Needs to Be Based on Fact, Not Subjective
Factors**

Over the years FSA has attempted to define a family farm, for purposes
of determining eligibility, in many different ways. These attempts, no
matter how well intended, have failed.

For example, the current definition requires lenders to subjectively
determine if the farm is "***recognized*** in the community as a farm,"
and that it "has a ***substantial*** amount of the labor requirements
for the farm and non-farm provided by the borrower's immediate family,"
and that it "may use a ***reasonable amount*** of full-time labor and
seasonal labor during peak loan periods." (2-FLP pages 6 and 7, emphasis
added)

We are concerned that some legitimate family farms do not qualify for a
guaranteed loan because of the subjective nature of the definition.
Without a definition that can be objectively defined and clearly
documented, there will continue to be uneven application of the
definition around the country resulting in some legitimate family
farmers being denied credit.

**Recommendation**: FSA should adopt a definition that can be
objectively measured and documented. We recommend the definition of a
family farm be that the entity being financed files a federal farm tax
return (1040 Schedule F or appropriate corporate form). If the entity
has farm income and expenses, it will file a farm tax return.

**Summary**

The American Bankers Association appreciates the opportunity to discuss
the issue of credit availability in rural America. Rural Americans enjoy
unlimited opportunities to finance their farms, ranches, businesses, and
homes at competitive rates and terms. We reject the Farm Credit System's
claim that something is missing in rural America.

Our system works so well because there is so much competition, and
because Congress has wisely chosen to restrict the role played by
government backed retail lenders that compete directly with the private
sector while at the same time creating ways for public resources to be
leveraged by the private sector to address the needs of limited resource
farmers and ranchers. We urge you to continue this policy.

I will be happy to answer any questions you may have.

[^1]: Calculated from the "Combined Statement of Income" found in the
    *2006 Annual Information Statement* published by the Federal Farm
    Credit Banks Funding Corporation, page F-6.