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74–343 PDF 2001

S. HRG. 107–188

FCA’S PROPOSED REGULATIONS ON NATIONAL

CHARTERS

HEARING

BEFORE THE

COMMITTEE ON AGRICULTURE,

NUTRITION, AND FORESTRY

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

FEBRUARY 26, 2001

Printed for the use of the

Committee on Agriculture, Nutrition, and Forestry

(

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

COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

RICHARD G. LUGAR, Indiana, Chairman

JESSE HELMS, North Carolina

THAD COCHRAN, Mississippi

MITCH MCCONNELL, Kentucky

PAT ROBERTS, Kansas

PETER G. FITZGERALD, Illinois

CHARLES E. GRASSLEY, Iowa

LARRY E. CRAIG, Idaho

RICK SANTORUM, Pennsylvania

GORDON SMITH, Oregon

TOM HARKIN, Iowa

PATRICK J. LEAHY, Vermont

KENT CONRAD, North Dakota

THOMAS A. DASCHLE, South Dakota

MAX BAUCUS, Montana

J. ROBERT KERREY, Nebraska

TIM JOHNSON, South Dakota

BLANCHE L. LINCOLN, Arkansas

ZELL MILLIER, Georgia

KEITH LUSE, Staff Director

DAVID L. JOHNSON, Chief Counsel

ROBERT E. STURM, Chief Clerk

MARK HALVERSON, Staff Director for the Minority

(II)

(III)

C O N T E N T S

Page

HEARING:

Monday, February 26, 2001, FCA’s Proposed Regualtions on National Charters ........................................................................................................................ 1

APPENDIX:

Monday, February 26, 2001 .................................................................................... 45

DOCUMENT(S) SUBMITTED FOR THE RECORD:

Monday, February 26, 2001 .................................................................................... 107

Monday, February 26, 2001

STATEMENTS PRESENTED BY SENATORS

Lugar, Hon. Richard G., a U.S. Senator from Indiana, Chairman, Committee

on Agriculture, Nutrition, and Forestry ............................................................. 1

Thomas, Hon. Craig, a U.S. Senator from Wyoming ............................................ 6

Hutchinson, Hon. Tim, a U.S. Senator from Texas .............................................. 8

Crapo, Hon. Mike, a U.S. Senator from Indiana ................................................... 10

WITNESSES

(PANEL I)

The Honorable Jim Leach, a Representative from Iowa ...................................... 2

(PANEL II)

Reyna, Hon. Michael, Chairman of the Farm Credit Administration, accompanied by: Ann Jorgensen, FCA Board Member ............................................... 13

(PANEL III)

Barry, Dr. Peter, Professor of Agricultural Finance, University of Illinois,

Urbana, Illinois .................................................................................................... 37

Burns, Phillip, Chairman, Farmers and Merchants National Bank West

Point, Nebraska .................................................................................................... 30

Leighty, Dale, President, First National Bank of Las Animas, Las Animas,

Colorado ................................................................................................................ 32

Webster, Jack, President and CEO, Farm Credit Services of America, Omaha,

Nebraska ............................................................................................................... 28

Williams, Bobby D., Grain Farmer and Board Member, Heritage Land Bank,

Tyler, Texas .......................................................................................................... 25

APPENDIX

PREPARED STATEMENTS:

Lugar, Hon. Richard G. .................................................................................... 46

Leach, Hon. James A. ....................................................................................... 47

Barry, Peter J. .................................................................................................. 97

Burns, Philip ..................................................................................................... 76

Jorgensen, Ann ................................................................................................. 66

Page

IV

PREPARED STATEMENTS—CONTINUED

Leighty, Dale ..................................................................................................... 84

Reyna, Michael M. ............................................................................................ 50

Webster, Jack .................................................................................................... 71

Williams, Bobby ................................................................................................ 68

DOCUMENT(S) SUBMITTED FOR THE RECORD:

Testimony of Ed Hester, Chairman of the Board, Federal Land Bank

Association of North Mississippi, FLCA ..................................................... 108

Testimony on Behalf of AgFirst Farm Credit Bank ...................................... 110

Letter submitted by Robert A. Carson, Marks, MS ....................................... 111

Letter submitted by Jack A. Anderson, St. Johns MI ................................... 113

Letter submitted by Donald E. Ludy, Director, Valley AgCredit ................. 114

Letter submitted by James D. Kirk, President and CEO, AgAmerica,

FCB ................................................................................................................ 115

Letter submitted by Carl Higbea, member of the Board of Directors

of AGRIBANK FCB ...................................................................................... 117

Letter submitted by Allaire P. Palmer, board member, Farm Credit of

Maine, ACA ................................................................................................... 118

Letter submitted by Daniel J. Corey, board member, Farm Credit of

Maine, ACA ................................................................................................... 119

Letter submitted by J. Allen Akkerman, President, Valley AgCredit ......... 120

Letter submitted by Henry E. McPherson, Director, Farm Credit of

Maine, ACA ................................................................................................... 122

Letter submitted by Raymond Parks, Chairman of the Board of Directors,

Agricultural Credit Association, Idaho ........................................................ 123

Letter submitted by R.K. Laird, Chairman, and James F. Martin, Jr.,

Vice Chairman, First South Agricultural Credit Association ................... 124

Letter submitted by Jeremy Oliver, Sr. VP-Corporate Finance & Information Services, AGCountry, Farm Credit Services ....................................... 126

Letter submitted by Raymond J. Nowak, President and CEO, Farm Credit of Maine, ACA ........................................................................................... 127

Letter submitted by Robert M. Tetrault, Chairman of the Board of Directors, Farm Credit of Maine, ACA ................................................................ 128

Letter submitted by Donnie Winters, President and CEO, Farm Credit

Services, Louisville, Kentucky ..................................................................... 129

Letter submitted by Daryl Oldvader, Chief Executive Officer, Farm Credit Services of Western Missouri ................................................................... 130

Letter submitted by Jim McKissick, Vice President of Brand Marketing

& Communications, AgStar Financial Services, ACA ................................ 131

Letter submitted by Don E. Wenell, CEO, AgCountry, Farm Credit Services .................................................................................................................. 132

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FCA’S PROPOSED REGULATIONS ON

NATIONAL CHARTERS

MONDAY, FEBRUARY 26, 2001

U.S. SENATE

COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY

Washington, DC.

The Subcommittee met, pursuant to notice, at 9:30 a.m. in room

328, Russell Senate Office Building, Hon. Richard G. Lugar (Chairman of the Committee) presiding.

OPENING STATEMENT OF HON. RICHARD G. LUGAR, A U.S.

SENATOR FROM INDIANA, CHAIRMAN, COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

Present: Senators Lugar, Thomas, Hutchinson, and Senator

Crapo.

The CHAIRMAN. This meeting of the Senate Agriculture Committee is called to order.

The hearing today will hear testimony concerning the Farm

Credit Administration’s proposed rule on National Charters. This

regulation outlines the procedures for allowing Farm Credit System

institutions to conduct agricultural lending outside their traditional

geographic boundaries.

For those of us with oversight responsibilities over the Farm

Credit System, today’s hearing is a good indication that the system

is healthy and competitive. During the mid-1980s, when the Farm

Credit System was suffering financial difficulties, this Committee

worked to help put together a legislative package that allowed the

Farm Credit System to weather those challenges. As a result of

those efforts, the system finds itself on sound fiscal ground.

Although we celebrate the system’s convalescence, today’s purpose is to explore whether the Farm Credit Administration has

gone beyond its grant of authority through its proposal on National

Charters. The Farm Credit Administration has wisely put this proposed rule out for a 30-day comment period, but there are several

public policy questions raised by this action that deserve our committee’s review and scrutiny; and thus, this hearing.

First and foremost, does the Farm Credit Administration have

the statutory authority to provide its associations with National

Charters? I will be interested, as will all Senators, in the various

views of witnesses on this topic.

Even if the Farm Credit Administration has the legal authority,

does the granting of National Charters advance a valid public policy, as well as the Agency’s mission statement? The Farm Credit

System and its regional lending limitations have been in existence

2

for over three quarters of a century, providing a dependable and

competitive source of credit for agriculture. Today’s hearing will explore whether National Charters will strengthen competition in agricultural lending, or whether it will lead to greater consolidation

among Farm Credit institutions and community banks.

Our first witness will be the Honorable Jim Leach of Iowa, who

as chairman of the House Banking Committee, thoughtfully explored through a hearing on this issue last year the issues that we

are discussing today. Our second panel consists of the Honorable

Michael Reyna, Chairman of the Farm Credit Administration and

the Honorable Ann Jorgensen, Board Member of the Farm Credit

Administration. Our third panel is made up of representatives from

the Farm Credit System, the banking industry and the academic

community.

We look forward to the individual testimony provided by these

witnesses, and our questioning of them. It is indeed a great pleasure to have Jim Leach before the Committee. He is a dear friend

and a very wonderful person to work with in the Congress. We

thank you for starting us out this morning.

[The prepared statement of Chairman Lugar can be found in the

appendix on page 46.]

Jim.

STATEMENT OF HON. JIM LEACH, A REPRESENTATIVE FROM

IOWA

Mr. LEACH. Thank you, Chairman Lugar, and I’m pleased to be

with my good friend, Mr. Thomas, as well.

I don’t have a formal statement, but I have some notes I’d like

to go over with you. I would say, Mr. Chairman, that I’m in my

25th year in the U.S. Congress, and I’ve testified before the U.S.

Senate less than half a dozen times. I consider this issue that you

are addressing today of seminal significance, and that is why I requested to come and speak before you.

And I must tell you, there are very few issues that I feel stronger

about. This proposal to allow the Farm Credit System, to have National Charters, and to in effect decentralize decision making within the GSA community, has major philosophical and market implications. It in effect will expand, and I want this statistic understood, 30-fold the number of Government-sponsored enterprises in

the American economy. That is the meaning of National Charters

for decentralized Farm Credit System entities.

Each of these new Government-sponsored enterprises will have

power greater than Fannie Mae and Freddie Mac. Each will be empowered at their own volition by a captive board, which has been

proven by this approach to have the power to authorize credit, not

just for farmers, which is what the Farm Credit System was established to serve. And it was established to serve farmers under the

assumption, which was probably valid at the time, that credit

availability in the farm economy was very weak.

It will be allowed to make economic development loans, business

loans, car loans, housing loans in all likelihood. You don’t know

where the limit will be because each of these will have National

Charters.

3

If you look at the market implications, there will be cherry picking and there will be predatory financing. There’s a possibility that

commercial interests will capture these institutions. And let me

give an example. Let us say you’re a major company that may

make agricultural equipment. Why wouldn’t you go to the nearby

Farm Credit System entity and say, look, for 1/16th of a percent,

you do all of our credit financing henceforth. Why should that big

company need to go to the private capital markets, when it can go

to the U.S. Government, in effect, for financing?

If we look at public implications, you’ll have Treasury management of borrowing absolutely thrown topsy-turvy. Because after all,

what GSEs have is what might be defined under a constitutional

term in an analogous way as a letter of mark on the capital markets. That is, these are financial entities that have the power of the

U.S. Government given to them to reach into the capital markets.

No one in this whole process has indicated that there is a need.

Is there a lack of credit for business loans in America? Is there a

lack of credit for real estate loans in America? Where is the lack

of credit? We have the freest capital markets in the history of the

world, and yet, this entity is coming and saying, we should socialize credit to a greater extent.

Now, there’s this theoretical thought that what a National Charter means may be simply to allow a bigger Farm Credit System entity in one State to give loans for agriculture in another State. But

I will tell you, the issue isn’t whether an Iowa Farm Credit System

entity wants to compete with a New York Farm Credit System entity for a Nebraska farm loan. First, there is zero need for that,

there is absolutely no proven need. And beyond that, in the history

of real estate credits, non-local decision making has always been a

prescription for disaster. It has never at any time been anything

other than that.

To the degree that one can say maybe there is a place somewhere

that doesn’t have adequate credit, which I don’t believe, because a

rural Farm Credit System entity can draw on the capital markets,

just as a larger one tied to a larger State. But you can share credit

between them if you have to.

What is at issue here is new activities for which no one has

shown need or demand, other than the Farm Credit System managers that have come to a captive board. Let me talk a little bit

about captive boards. Several years ago, a rule was put out for this,

and it failed to get any support.

Last year, the board put out a booklet as a way around formal

rulemaking. We submitted this booklet to the General Accounting

Office, and asked whether or not it conformed with United States

law. The General Accounting Office came back and said it did not.

In other words, and I want to be very careful in my words here,

this board attempted an illegal end-run of the U.S. Congress and

the Executive Branch, which did not support their efforts. I want

to repeat as carefully as I can, an illegal end-run.

Now, because it was forced by the General Accounting Office ruling to come back in a formal way, and you were so right in your

opening statement to say, does it have the legal authority in a rule,

or is this a process, it has come back in the most unseemly manner

at a time of Administration transition. And as you know, and Mr.

4

Thomas knows, and I thank the gentleman from Arkansas for coming, the new Bush Administration has put under review late Clinton Administration rulemaking. And then the Administration requested that people go a little bit slow on new rulemaking until it

gets its time and place.

But what we have here is not late Clinton Administration rulemaking which is the concern of many in the Republican party. We

have a board of Clinton appointees who have made a rule in this

Administration that in effect is to be put in place in an unseemly

30-day comment period before people have had a chance to think

through what is the right philosophy and the right policy.

All over the world, we are telling Governments that they ought

to have market-oriented reforms. This runaway Government agency, and I stress this, is proposing massive socialization of credit in

the greatest free market economy in the world, at the very same

time we’re saying to other countries that they ought to go to more

market reforms.

Finally, let me just say, so that there’s an understanding by perspective, as the former chairman of a committee of some jurisdiction over the financial industry, I’ve objected to a number of initiatives in the Office of the Comptroller of the Currency, I’ve objected

to a number of policies of Freddie Mac, of Farmer Mac, that have

been aimed at expanding, I believe, outside the judgment of the

markets, as well as the law.

But this is the single greatest act of administrative arrogance I

have ever seen. The issue isn’t what’s good for the Farm Credit

System. As a system, all systems want greater power. The issue is

what’s good for the American economy, and whether you want to

have a market system or whether you want to have socialized credit. And what we have here is a system generated proposal, a captive Federal regulatory agency, proposing to massively change the

nature of rural finance, under the assumption that America’s commercial banks, America’s savings and loans, America’s credit

unions, America’s insurance companies, America’s financial companies and real estate and a whole host of other companies, do not

have the capacity to serve our market economy.

I think it is preposterous. I think it is philosophically out of step.

And I believe that it is an attempt to usurp the jurisdiction of the

U.S. Congress by a very small numbered board, as well as thumb

the nose at the Executive Branch. And I believe that this board

proposal should be absolutely rejected.

And I apologize for being as unbalanced as I have in this presentation, because I am one who thinks the Farm Credit System has

served the farm economy well over the years. But to the degree it

moves outside service to the U.S. farmer, I think it’s going to lose

an awful lot of support in the farm community. And to the degree

it, has the implication of consolidating finance, I think will be moving in a less competitive way in the American financial system.

And finally, I would just stress again, the issue here is whether

or not there’s a case for socializing credit to a greater extent than

it’s already occurred.

I thank you all.

[The prepared statement of Mr. Leach can be found in the appendix on page 47.]

5

The CHAIRMAN. Well, thank you very much, Mr. Leach.

Let me just ask the question I raised in my opening comments,

and you acknowledged that—— does the Farm Credit Administration have the statutory authority to provide its associations with

National Charters? Will you state your view on that question?

Mr. LEACH. It’s a close call. Clearly, the booklet approach that

it proposed last fall was defined to be in violation of two laws of

the U.S. Congress. To me, it’s inconceivable that a board would

think through rulemaking it would have the power to change the

entire mission of the Farm Credit System. And I believe it should

happen by law itself.

I will tell you that in a court of law, there is a general deference

to Executive Branch Agencies under the Administrative Procedures

Act. So I cannot define how a court would rule.

I would say you would be confronted with a very unique situation

in a court setting, however, because this would be one of, in fact

the only instance I know of, where the Court would be caught in

a little bit of a bind, where it is, the general administrative law

precedent is that courts give deference to administrative agencies

unless there is a capriciousness that’s proved on the other side.

But in this case, you would have in all likelihood the Executive

Branch itself against the Executive Branch Agency. And so how a

court would rule in that setting becomes much more difficult. And

I can’t predict that. All I can say is that I consider this to be thoroughly unseemly, and I would think you’d need an act of Congress

to make this abrupt change.

I would only say that because the Agency will come and say, we

just have these small steps in mind, well, small steps lead to other

steps, and this becomes the most uncontrolled process imaginable.

The history of GSEs is a desire for expanded power. All GSEs try

to spread their wings.

So one of the great questions is, do you nip this type of thing in

the bud or do you have an inevitability of more power through the

socialized credit mechanism of GSEs.

The CHAIRMAN. My second question follows whether or not there

is statutory authority, is it a good idea in terms of extension of

Farm Credit? The testimony often in the past, by that I mean in

the last two decades, has been on occasion that Farm Credit was

deficient in many agricultural regions of the country. You come

from a district in Iowa which obviously has Farm Credit needs, and

we have Senators present today who will testify from their standpoint.

Mr. LEACH. I have never in my State found any deficiency. In

fact, if you talk to competitors of the Farm Credit System, you’ll

see that they are everywhere I know of in America. There are very

aggressive lending policies by the Farm Credit System toward

farmers. I know of no case where it isn’t. And if one can show me

cases where the Farm Credit System is not, I would be amazed.

Beyond that, under its current authorities, because it has a claim

on the U.S. Government borrowing system, there is no Farm Credit

System that is denied credit availability. For example, if you take

a commercial bank setting, a commercial bank has to rely upon

getting deposits, usually from a local base. And sometimes these

deposits are hard to come by, and one might argue a commercial

6

bank might have a hard time getting deposits at one time or another.

But that argument never applies to the Farm Credit System.

Across the country, they have an ability to draw upon a national

pool. And so, maybe someone can find a Farm Credit System entity

that chooses not to be aggressive. But I’m hard pressed to know of

it.

The CHAIRMAN. During Congressman Leach’s testimony, we’ve

been joined by two additional Senators. Senator Thomas was here

at the beginning, and I postponed any additional statements at

that point until we had sort of an accumulation, if possible. But let

me ask now, Senator Thomas, if you have an opening comment

and/or questions of the witnesses. I will ask that of each of the

other two colleagues.

STATEMENT OF HON. CRAIG THOMAS, A U.S. SENATOR FROM

WYOMING

Senator THOMAS. Thank you very much, Mr. Chairman. You’ve

kind of got the freshman class here on your committee today, which

is welcome.

I don’t have a statement, but I am, although I’ve been involved,

certainly aware of the Farm Credit activity in Wyoming, I’ve not

been involved in the background of it. I understand what you’re

saying is, where it appears that this was simply an effort to expand

the lending field for any particular, you’re saying it will change the

role of these lender?

Mr. LEACH. Well, there can be only one purpose of this,Senator,

and that is to make new types of lending, that is, to expand the

powers of the Farm Credit System. And that means business loans,

it means car loans, it means any kind of loan you want to visualize.

And the case will be made that the jurisdiction of the Farm Credit

System is not farms, it’s the rural community.

And that’s really good for the Farm Credit System manager. But

I would say, just as strongly as I can note that this is a grant of

power greater than Fannie Mae or Freddie Mac. And it can be done

on a national basis.

One of the things that will occur here, and one of the arguments,

by the way, is it will make it easier for the Farm Credit System

to follow their big national customers. And let’s take my State as

an example. The only argument that I’ve ever heard of this is that

it means that a large hog producer, and let’s abstractly say in

North Carolina, where the center of hog production is, will be able

to take a captive Farm Credit System entity and make its loans

more easily nationwide.

Well, if you think about the Farm Credit System, in its original

Charter it was to serve individual farmers of modest means. And

I believe this inevitably is a big agribusiness approach that will

end up pushing what in effect are bigger and bigger entities that

become conglomerates, whether it be in hogs, or let me just give

another example. As I read this potential intent, does this mean

that a Cargill, a John Deere, two wonderful American companies,

can suddenly go to the Farm Credit System for all their credit

needs? And what you’ve done is socialize credit for anyone that

claims an agribusiness, for IBP, for Tysons Foods.

7

These are great American companies, but do they need to go to

the U.S. Government for their credit? And I would tell you, these

companies probably don’t even know about this proposal.

But once it becomes law, I just ask, if any of you are treasurers

of a major agribusiness company, isn’t your first thought going to

be that you’re going to go to the closest FCS entity, and actually

the smaller the better, because it doesn’t matter how big or small

a Farm Credit System entity is, because it has the power to tap

into the Government credit market. And you will have a case, and

they will say, absolutely, we’ll provide you all the credit you want.

Well, again, you talk about a concentration. I have a great deal

of respect for all of these entities. But does that disadvantage the

local elevator? Or now, does the local elevator have to go to the

Farm Credit System? And then, what is the role of a community

bank?

The CHAIRMAN. Really, it doesn’t specifically change their mission, but you think it will expand it, just by the nature of the——

Mr. LEACH. Oh, it totally changes their mission. It makes them

a service of business, it makes it a service of all of the credit circumstances in maybe towns under 50,000, maybe States that are

principally agricultural. Who knows.

The CHAIRMAN. Well, I’d be very involved over here, in trying to,

with our FAIR bill and so on, trying to ensure that the Government

is not expanding beyond into areas that could be reasonably done

in the private sector.

It’s my understanding that the local units, there’s not a vote of

the local units to move forward with this. Are you aware of that

one way or the other?

Mr. LEACH. I will say this. There have been, at various times,

concerns that smaller Farm Credit System entities will be competing against larger. But if you wonder about what the System has

pressed downward, when the booklet approach came out, many,

many Farm Credit System entities immediately applied for a national charter, because they knew the implications. There would be

nothing competing against them, and all sorts of new powers for

them.

It has dawned on them that the implications are the cherry picking of every local business. Let’s say, Mr. Thomas, you’re the manager of a Farm Credit System entity in a nice, rural community.

Well, you know who the nice, local businesses are as well as a local

banker. You will simply come and say, we can borrow from the

Government at a given rate, and we’ll give you a lower interest

rate loan.

Now, here let me mention there’s a macroeconomic phenomenon

that’s fast emerging on the American scene. And that macroeconomics is that America is now a non-saving economy. And to the

degree we do save, we’re increasingly going towards putting our

money as a society into investments like the stock market. So it’s

harder and harder and more expensive for local institutions to

raise capital.

By the same token, we in the Congress, because of a strong economy, have been able to depress our debt efforts, and we’re paying

back debt. But what this means is, in all possibility, especially for

what we call the marginal cost of funds of the extra dollar that

8

might come into a financial institution, the Government’s cost of

funds, relatively speaking, may go down. The private sector may go

up. And this means that the competitive position of all governmentsponsored Enterprises increases dramatically.

With this type of step, you could well have an absolutely calamity on private sector financial businesses. It could be the greatest

unfair competition in modern times.

Senator THOMAS. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator Thomas.

Senator Hutchinson.

STATEMENT OF HON. TIM HUTCHINSON, A U.S. SENATOR

FROM TEXAS

Senator HUTCHINSON. Thank you, Senator Lugar. Thank you for

calling the hearing today, and Chairman Leach, it’s good to see you

again. Good to have you over.

Mr. LEACH. I’m honored to be with you, sir.

Senator HUTCHINSON. You make some very strong statements,

and a very clear position, I think. You repeatedly call this the socializing of lending or the socializing of credit. You kind of mitigate

a little bit at the end by saying this system has served farmers

well. So do you object to what the current credit system, the way

it operates?

Mr. LEACH. No, I support the current System, and so do farmers.

And a very interesting point, Senator, is there is no——I mean, I

represent a farm State. We consider it the greatest farm State, although California has greater production. In 25-years, I’ve never

had a farmer come to me and say, Jim, I want the Farm Credit

System not to serve just me. I want it to serve everybody else.

And I will tell you, farmers want the Farm Credit System for

themselves. And to the degree that you make the Farm Credit System serving, in many cases, their competitors, you’re going to have

support within the farm community potentially decline.

Now, I’m confident that the System has probably gone out and

gotten some farm group some place to endorse it. But for the life

of me, no individual farmers I have ever represented have come to

me and said, we want the Farm Credit System for others rather

than for us. And I believe that to the degree it goes outside serving

the farmer, it will lose support politically and socially.

Senator HUTCHINSON. I am a new member to the Committee, and

am just now becoming familiar with some of these issues. Explain

to me simply, you’ve done a good job in response to Senator Thomas, but what will be the practical implications? If you have a National Charter, when you talk about agribusiness, when you talk

about the Tysons, how is the mission changed by this rule?

Mr. LEACH. Well, it changes in two ways. They’re looking to follow the bigger agribusiness customer. But frankly, that isn’t that

much of a problem today, because they serve some types of agribusiness customers fairly well. But they don’t serve big corporate

businesses, for example, the Deeres of the world. They serve those

people that are into production.

But what they want to solve is rural economic development,

which is the key thing. And that has a natural attractiveness, all

of us that come from rural States. But what that means is that

9

they want to give business loans. And people shouldn’t be mistyeyed about it. They want to socialize credit for American business.

And then they will define towns under 50,000. The Farm Credit

System wants to get into real estate services. They want to get into

car loans. They just want to do everything in finance.

And what happens is, once you set up this structure, if you’re the

manager of a local Farm Credit System agency, or if you’re one of

the regional district managers, you see an infrastructure out there,

and you say, why can’t we expand, because we have this great infrastructure. It’s very natural.

But there’s no community demand for it. And it simply is another tap on the Federal treasury that is going to jeopardize, I believe, America’s private market system.

Senator HUTCHINSON. So the socialized credit, as you’ve called it,

is okay for small, individual farmers, but we shouldn’t expand that

into business and the broader——is that a fair——

Mr. LEACH. Well, we have developed GSEs for limited purposes.

One purpose, for example, in housing. For Fannie and Freddie, we

developed a secondary market. And also for the Federal Home

Loan Bank System, it serves as a secondary market for housing

loans.

Another GSE we——

Senator HUTCHINSON. You have no objection to it?

Mr. LEACH. No, I don’t.

Senator HUTCHINSON. Is that socialized credit, though?

Mr. LEACH. Yes, it is. Yes, it is. But Congress tried to do it with

as limited a purpose as possible. By the way, Freddie Mac, when

it was set up, was set up as a year and a half trial. It was intended

to be privatized. They ended up privatizing ownership and keeping

their public powers, a very unique circumstance.

In any regard, each of these GSEs wants to expand their authority and spread their wings as widely as they can. It’s an understood

phenomenon. And it’s up to the public decision makers to say, do

you want to have a private economy or do you want to have a

greater socialized credit.

Now, in the Farm Credit System, the idea was that it looked like

credit in agriculture was going to be very difficult to come by, So

for the sake of the family farmer, we established this System.

But let me give you an example of the types of abuses that come

into play. We have established another secondary market for agricultural loans called Farmer Mac, a really wonderful intended institutional arrangement. It didn’t quite work for its intended purposes on a profit-making basis, because community banks wanted

to keep their good loans and would only want to give a bad loan

to Farmer Mac.

So what happened to Farmer Mac? One American commercial

bank bought a third interest in it. One-third. And then to make

money, because it’s a money losing proposition, all it does basically

speaking today is arbitrage. That is, they take down Government

credits at a given amount and then they buy lesser rated securities.

For example, you take down a Government credit, let’s say, at a

given time, at 6-percent for a given tenure, time period, and then

you buy a bond, whether it be AAA or B, BB. And you buy it at

7-percent.

10

So you take down your Government credit at one rate and you

arbitrage with other types of credits to other rates that have nothing to do with agriculture. These are powerful, powerful entities,

each one going in new ways that were never conceived by the U.S.

Congress. That is what——and by the way, Farmer Mac has less than $100 million equity, and it has billions of dollars of arbitrage

activities.

And it’s an absolutely political science umbrage, the way it operates. And what you’re going to have here is some Farm Credit System with national charters, not local charters, coming up with new

ways to tinker with the system. And outsiders are going to figure

it out very quickly and take advantage of it.

Senator HUTCHINSON. I spent a good part of last week in the

delta of Arkansas talking, learning, studying agriculture in our

delta and where the availability of credit means the difference in

survival or bankruptcy for these farmers. It’s your contention that

a National Charter works against the welfare and the benefit of individual farmers?

Mr. LEACH. Well, let me ask you how it helps them any more.

Your local Farm Credit System entity can serve them fully. Absolutely fully. If they claim that the loan is too big, they can share

it with other Farm Credit System entities in other parts of the

country. What farmer is not served by the Farm Credit System,

and what farmer is going to be better served by this?

And then, who is it that these people want to serve? If you go

to the agricultural area, is it going to be a hog producer from out

of State? Is that helpful for the Arkansas hog producer? You’re a

razorback State. I don’t know. You’ve got to tell me, you have to

name, I mean literally name a farmer that’s going to be helped by

this.

Now, you might say that the farmer may invest in a business in

town and that maybe you can come up with some lower priced

loans for that, and that’s true. That’s quite possible.

Senator HUTCHINSON. Or you could argue that economic development in general is going to benefit the area and therefore

benefit——

Mr. LEACH. You could. Then the question is, do you want to do

this through the Government credit mechanism, or maybe you represent a lot of community banks that don’t function. I don’t know.

But I will tell you, in rural Iowa, we are unbelievably competitive

in sources of credit. Just unbelievably competitive.

Senator HUTCHINSON. Thank you. I know my time has long overexpired.

The CHAIRMAN. That’s fine, and those were important questions.

Senator Crapo.

STATEMENT OF HON. MIKE CRAPO, A U.S. SENATOR FROM

INDIANA

Senator CRAPO. Thank you very much, Mr. Chairman. And

Chairman Leach, I, too, appreciate having you over here in the

Senate with us. I served with you in the House and appreciated

those days and learned to work very closely with you there.

As a matter of fact, I served there on the Commerce Committee

when we worked for many years on the financial services modVerDate 11-MAY-2000 10:34 Jan 17, 2002 Jkt 074343 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 C:\DOCS\74343.TXT SAG1 PsN: SAG1
11

ernization legislation and came over here and ended up, for one of

my committees, serving on the Banking Committee working on it

as we finally put legislation together that achieved passage.

And one of the pieces of the Gramm-Leach-Bliley financial services modernization legislation that I and many other members from

States with large rural constituencies and strong agriculture bases

fought to include was one that enhances small bank access to the

Federal Home Loan Bank System by removing certain membership

requirements and making it easier for small banks to have access

to FHLB advances for AG and capital.

This provision, I think, gives small banks access to cheaper capital. And one of the reasons that this was so important was that

it allows them to better compete with the Farm Credit System that

has access to cheaper capital.

Could you tell me how this new proposal that we’re talking about

today would impact, if you could, or if you have an opinion on it,

how it would impact the ability of our private sector financial institutions to meet the lending needs of our ag community?

Mr. LEACH. Well, you raise a very profound feature of the financial modernization package. That is, a lot of people don’t realize

that aspects of the financial modernization were designed to serve

rural America dramatically. And so if you’re an individual farmer,

for example, in Arkansas, you’ll be able to go to the Farm Credit

System for a loan. You’ll also be able to go to a commercial bank,

which will also have the capacity to tap into the Federal Home

Loan Bank System, which is another GSE.

So you will have more sources of credit than you’ve ever had before. The farmer is really in the driver’s seat on finance today. If

market prices were only a little bit better. And so I don’t see how

this enhances in any way the individual farmer. What it does do

is take the Farm Credit System and give it new jurisdictions, new

powers that are unknown in their full dimension.

Senator CRAPO. Well, thank you. And I’m sure you know, coming

from your State, that in agriculture today, one of the big problems

is frankly getting continuing financing for operations of farming operations that are not able to meet their financial obligations. As I

understand your testimony, it’s your belief that the proposal that

is on the table is one that would not increase the availability of

capital or financing to farm producing entities. Is that correct?

Mr. LEACH. It does not increase in any way whatsoever to any

individual farmer any credit availability. It probably increases

credit availability to competitors of modest sized farmers, because

it will make credit availability easier for large agribusiness.

Senator CRAPO. I know you’ve basically said this in a number of

different ways, but I’d like you to one more time just briefly describe to the Committee, what was the original purpose of the

Farm Credit System?

Mr. LEACH. The Farm Credit System was set up at a time when

we were looking at serious problems of credit in the Agriculture

community, to serve individual farmers, particularly of modest

means. And it’s ironically the success of the Farm Credit System

that has caused it to want to look to new and greater market penetrations.

12

So I consider this to be a very natural desire within the System

managers, but not one that has anything to do with the individual

farmer, and everything to do with whether or not the System ought

to be serving non-farmers.

Senator CRAPO. With regard to those non-farmers that you reference there, regardless of the question of whether there is a need

to expand basically a Government supported financial system for

those farmers, well, I guess the question I’m getting at is, is there

a need for a new source of lending for those non-farm entities, or

those non-farm production services that would be reached by this

proposal?

Mr. LEACH. Right now, in rural America, as we all know, there

are some real traumas that are largely based on pricing. But if you

add up the sources of credit, whether they be the Commercial

Banks, Insurance Companies, the Farm Credit System, there are

three Government-sponsored enterprises that currently serve rural

America: Farm Credit System, Commercial Banks that can tap into

the secondary market; two other Systems, one is the Federal Home

Loan Bank System, which under the recent modernization law they

can now do, and then thirdly, Farmer Mac.

So basically speaking, there are three GSEs serving agriculture.

No other part of the American economy has anything like that. And

partly, I think, because of this competition within the GSEs, the

Farm Credit System would like to get out and serve new markets

that are non-farm markets. And that is really what’s at issue

today, whether the U.S. Congress wishes to change the mandate of

the Farm Credit System into a non-farm mandate.

And my own view is that we ought to keep it as a farm mandate

rather than a non-farm mandate.

Senator CRAPO. Thank you.

The CHAIRMAN. Thank you very much, Senator Crapo.

Mr. Leach, we thank you very much for coming and spending

this time and responding to these questions of Senators who have

quite an interest in this subject.

Mr. LEACH. Thank you. I appreciate your courtesy.

The CHAIRMAN. It’s a privilege now to call before the Committee

the two sitting board members of the Farm Credit Administration.

They are the Chairman and Chief Executive Officer, Michael

Reyna, and Ann Jorgensen.

We welcome both of you.

Let me just say for benefit of the Committee and those following

the hearing, last month I had a very good opportunity to visit with

both Chairman Reyna and Ms. Jorgensen about affairs over at the

Farm Credit Administration. This committee has oversight for

Farm Credit, as we recited a little bit of the history that was much

more difficult during the 1980s, the 1990s being a happier time.

But new members of the Committee will know that the Committee has taken seriously this responsibility. Credit for farmers and

for rural communities in our country is the prime responsibility of

the Committee. And Farm Credit Administration, in our judgment,

has done well by all of these folks.

Now, at the time of our visits, I was informed that a 30-day rule

or 30-day hearing period would commence. And so one reason for

having this hearing today, we’re about, by my calculation, about

13

10-days into the 30-days. There are still 20-days to be heard. And

it was important, even though there are all sorts of priorities of the

Committee, to move swiftly, so that a number of parties could be

heard in public. This may or may not stimulate others who will

wish to inform the System of their views. But we certainly wanted

to make certain at a timely point that we fulfilled our responsibility, and we are grateful to both of you for coming this morning to

present your thinking, the case to be made for the rule you proposed.

I’ll ask you to testify, Chairman Reyna, and if you have additional testimony, Ms. Jorgensen, we’d be pleased to hear from you

likewise.

STATEMENT OF HON. MICHAEL M. REYNA, CHAIRMAN AND

CHIEF EXECUTIVE OFFICER, FARM CREDIT ADMINISTRATION ACCOMPANIED BY: HON. ANN JORGENSEN, FCA BOARD

MEMBER

Mr. REYNA. Mr. Chairman and members of the Committee, my

name is Michael Reyna, Chairman and Chief Executive Officer of

the Farm Credit Administration. Joining me is my fellow board

member, Ann Jorgensen, who I might note returned from her anniversary trip to be here with us today.

The CHAIRMAN. We thank you.

Mr. REYNA. I’m pleased to be here with you today to discuss the

role of the Farm Credit Administration and the Farm Credit System in providing sound, dependable and affordable credit to American farmers and ranchers, their cooperatives, rural utilities, rural

homeowners, in both good times and bad. I’m pleased to report to

you that the financial condition of the System is strong, despite the

challenges and difficulties facing agriculture.

I plan to use this opportunity to explain our proposal and proposed regulation concerning National Charters for System institutions. Just briefly, the FCA is an independent Executive Branch

agency of the Federal Government. It Charters, regulates and examines all System institutions. The responsibility of FCA is to ensure that System institutions operate safely and soundly and comply with all applicable laws.

The FCA’s governing body is a full time three member board.

The President, with the advice and consent of the Senate, appoints

each FCA board member for a six-year term. The President designates one board member as Chairman of the Board, who serves

until the conclusion of that member’s term. The Chairman also

serves as the FCA’s chief executive officer.

I have provided written testimony to the Committee, and I’d like

to skip ahead to the issue that’s before the Committee today, if I

might.

The CHAIRMAN. The full testimony will be made a part of the

record.

Mr. REYNA. Thank you.

Perhaps the biggest challenge facing the System is the fact that

it is a single sector lender in a shrinking market. The number of

farmers and ranchers has steadily declined since the System was

founded in 1916. However, the System’s mission, to finance agriculture in both good times and bad, remains the same. And in conVerDate 11-MAY-2000 10:34 Jan 17, 2002 Jkt 074343 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 C:\DOCS\74343.TXT SAG1 PsN: SAG1
14

trast, the System’s competitors can abandon agriculture during recessions, and lend instead to the other sectors of the economy

where profit potential is greater and credit problems fewer.

Loan portfolios of System institutions, as single industry lenders,

are concentrated in agricultural commodities. Some of the larger

System institutions have successfully diversified the Agricultural

commodities in their loan portfolios. As of September 30, 2000,

however, there were 197 instances at 135 associations where loans

to a single commodity exceeded capital.

The System lends overwhelmingly to agriculture, which is the

sector of the economy that is particularly vulnerable to changes in

commodity prices, currency fluctuations, bad weather, diseases,

pests and other difficulties. The System’s market share slipped during the farm crisis of the mid-1980s. During the 1990s, the System’s market share rose modestly and then leveled off.

Historically, the Charters of many System associations have confined their operations to geographic areas where the agricultural

economy is dependent upon two or three commodities. These geographic barriers make it increasingly difficult for associations to

compete. Trade creditors are not subject to geographic limitations,

and geographic restrictions on commercial banks have eased in the

past decade. New technology, such as e-commerce, also expands geographic markets for lenders and other financial service providers.

Obviously these commodity and geographic concentrations pose a

special challenge to the System and to FCA as a safety and soundness regular. The System is responding to these challenges. Many

System associations have merged, consolidated or restructured

their operations in the past three-years. As a result, these associations have become more efficient, which lowers cost of credit to

farmers, improves customer services and increases earnings to

these borrower-owned institutions.

System institutions have also embraced technological innovation,

and they routinely use the internet to reach customers. These

changes are good, but more is needed to assure that the System

can meet the challenges facing a single industry lender in an economic environment that is undergoing continual and rapid change.

If the Farm Credit System is to remain a viable source of credit

for American’s farmers, ranchers and rural communities, as Congress directed, it must be able to respond to these changes in these

markets that it serves. This is not a new concern. Our proposed

rule on National Charters would help the System modernize its

credit delivery structure, and at the same time maintain safe and

sound operations. The National Charter rule would end FCA’s

practice, and I stress it is a practice, of generally issuing exclusive

territorial Charters to direct lender associations.

The FCA’s authority to grant and amend Charters to System institutions is clear and unambiguous. The courts have reaffirmed

this authority on several occasions. With limited exceptions, Farm

Credit statutes do not require exclusive charters for System institutions. Instead, the FCA, as a matter of policy and practice, usually

issued exclusive Charters to direct lender associations.

Notwithstanding this fact, the territories of a number of associations have overlapped for some time. Over-chartering has not posed

any safety and soundness concerns. Again, just to digress for just

15

a moment, there’s in excess of 200 counties in the United States

right now where over-chartering currently exists. About 100 or

more of those have been over-chartered for upwards of eight-years,

and again, no safety and soundness concerns.

The Agricultural Credit Act of 1987 encouraged the Farm Credit

System to restructure by creating four new types of institutions:

Farm Credit Banks, Agricultural Credit Banks, Federal Land Credit Associations and Agricultural Credit Associations. This restructuring has led to numerous instances of overlapping territories and

competition among associations. This has led to the increasing public discussion and debates over whether FCA should end its policy

of exclusive Charters for direct lender associations.

Our proposed National Charter rule culminates a decade of discussion and debates about how to ensure that the System remains

safe and sound and relevant to farmers, ranchers and other rural

residents who borrow from it. In May of 1990, the Secretary of the

Treasury issued a report on GSEs that recognized the System faced

unusual business risks. This report acknowledged that System

Charters limit the operation of individual associations to specific

regions, causing an institution’s performance to rise and fall with

the fortunes of a single crop or perhaps those with a limited number of customers.

Although the Secretary’s report made no recommendation on how

best to address the problem, it generated much thought, discussion

and debate. It actually didn’t formally recommend the consolidation

of System institutions, but it certainly implied that, that was the

direction that would best suit the System. I actually happen to disagree on that point.

The FCA raised the first question about ending the policy of geographically exclusive Charters in 1994 when it asked the public to

comment on a proposed board policy statement to end non-exclusive Charters. At other times during the past decade, FCA has

sought input and ideas from a wide variety of sources, including

the general public, academicians and policy experts. In July of

1998, the board issued a philosophy statement that, among other

things, announced support for abolishing geographic restrictions on

System institutions. The first major step in implementing this philosophy occurred in 1998 when FCA published the rule that would

have repealed regulations that required notice and consent when a

direct lender made or participated in loans in a territory of another

association.

The Agency received over 200 letters, considerable comments

during the 180-day comment period. Reaction was split. The board

suspended action in early 2000 to study the matter further.

In April of 2000, the board adopted a final rule that repealed notice and consent requirements that applied to System institutions

who bought participation interests in loans that a commercial bank

made in the territory of another System institution. By repealing

these regulations, the FCA board authorized System institutions to

participate in loans that non-System lenders, banks and others,

made, and made to eligible farmers and ranchers anywhere in the

United States.

The FCA did not repeal the notice and consent requirements for

direct lending. Instead, the board announced in March of 2000 to

16

remove geographic barriers by granting National Charters to System direct lenders that apply for them. The FCA sent a booklet to

all System institutions that provided guidance on National Charters. We also posted our booklet on the web site at that time.

After this initial process, about 97-percent of all eligible institutions indicated an interest in an expanded or National Charter.

The booklet imposed no new System requirements or no new requirements on System institutions. And what it did is indicate the

board’s willingness to accept a National Charter application from

any direct lender that voluntarily applied for one.

Our Charter initiative sparked an intense public interest and debate when the booklet was published in the Federal Register, and

we received over 1,000 comments on the National Charter initiative. Several parties raised procedural concerns about the booklet.

They believed that the law requires FCA to pursue notice and comment rulemaking for National Charters.

While FCA’s legal counsel continues to believe that the Agency

may issue or amend Charters without conducting a formal rulemaking, the board decided to go ahead and propose a rule. A rulemaking dispels any doubt that this initiative does not comply with

applicable administrative procedure laws. Second, the rule will establish strong business planning requirements for any association

that applies for and receives a National Charter. And third, the

rule requires associations that request and receive a National

Charter to comply with all existing FCA regulations that impose

strong and enforceable capital, loan underwriting and internal control requirements on all System institutions.

Before I describe our national proposal rule in greater detail, I

want to reiterate that the ideas expressed in the proposal are not

new. Indeed, FCA and the System and Commercial Banks and the

Trade Associations, Academicians, policy experts have debated the

removal of geographic restrictions on System institutions for several years. The FCA adopted a proposed rule on January 11th of

2001 and sent it to the House and the Senate Ag Committees for

30-day review. The rule was published in the Federal Register on

February 16th for a 30-day comment period. And I want to assure

you that we’ll seriously consider and carefully weigh all substantive

comments that we receive about this proposal.

I want to speak briefly about the criteria for National Charters.

The proposed rule would establish clear standards so the direct

lender associations may apply for and receive and operate safely

and soundly under a National Charter. The National Charter authorizes a direct lender association to exercise all powers conferred

onto it under the Farm Credit Act and FCA regulations throughout

the United States and the Commonwealth of Puerto Rico, or within

the territories that FCA specifies.

And again, at this point, I want to stress that it’s geographic

broadening of the Charter. It has no effect on new products or services. That is not the change in the Charter that is being proposed

here.

National Charters will not initially include the territories of certain associations that currently operate in Alabama, Mississippi,

New Mexico and parts of Louisiana. The statute requires shareholders in these associations and their funding banks, in some

17

cases, their boards of directors, to consent before FCA can add the

territory to the Charter of any other System institution. There are

protected areas that do not authorize FCA to over-charter those

areas. FCA initiated separate rulemaking so that the farmers and

ranchers who own those associations in those particular four States

will have an opportunity to vote on whether to allow other associations to serve their territories.

No direct lender or association under cease and desist order

that’s become final is eligible to request a National Charter. Once

an association receives a National Charter, the FCA reserves the

right to restrict the association’s operations if it fails to operate

safely and soundly. Each association that receives a National Charter will be assigned a local service area. For existing associations,

LSA is the local territory that they served immediately before receiving a National Charter. Under the proposed rule, each association with a National Charter must offer credit and related services

in its LSA.

Additionally, the LSA requirement will ensure that the System

as a whole carries out its public policy mission of extending credit

and related services to farmers, ranchers and other eligible customers in every part of the United States. Therefore, each association with a National Charter must provide dependable, sound and

adequate, competitive and constructive credit and related services

to all eligible, creditworthy customers within its LSA on a priority

basis, consistent with safe and sound lending practices.

FCA expects each Nationally Chartered Association to make special efforts to serve young, beginning and small farmers in the

LSA.

The proposed rule establishes procedures that each association

must follow when it applies for a National Charter. Additionally,

each association that applies for a National Charter must comply

with new regulatory and business planning requirements, and at

a minimum, an acceptable business plan must include a mission

statement, internal and external factors that are likely to affect the

Association during the planning year, quantifiable goals and objectives, pro forma financial statements for each year of the plan, an

operating budget, a capital adequacy plan, and a detailed plan for

activities within the LSA. These business plans must be updated

each and every year.

Each Nationally Chartered Association must comply with statutes and regulations that govern capital adequacy, loan underwriting and servicing requirements, internal controls, consumer protection, equal credit opportunity and fair lending practices. Additionally, the FCA will allow only direct lender associations that operate

in accordance with capital, asset quality, management, earnings, liquidity, interest rate sensitivity and other safety and soundness

standards to lend and offer related services nationally.

In conclusion, Mr. Chairman, members, the Farm Credit System

must meet the challenges of a rapidly changing agricultural economy to achieve its mission of providing sound and dependable and

affordable credit to farmers, ranchers and their cooperatives. This

System has made significant progress in building and maintaining

its financial strength in the past decade so that it can better serve

customers. However, the pace of change in the rural economy is

18

quickening. And the System must remain ever vigilant if it is to

remain relevant to farmers.

Improving geographic diversity, reducing industry concentration

of System loan portfolios is essential for mitigating safety and

soundness risks. The FCA board believes that the proposed rule on

National Charters ensures that the system remains a dependable

source of credit for farmers in a competitive and rapidly changing

environment.

I thank you for the opportunity to address this committee about

the challenges facing both FCA and the System, and to explain the

proposed rule on National Charters.

I’d actually like to take just a moment, if I might, to share with

you some words that took place probably three and maybe even

four-years ago, just briefly. From June of 1996, Comptroller of the

Currency, Eugene Ludwig: ‘‘Rewriting the laws that govern banking and financial services must be based on fundamental principles, principles that respect rather than fight market forces that

are shaping the banking industry.’’ Later that year, he also said before the annual financial services

forum of the New York State Bankers Association, ‘‘Financial modernization is first and foremost a safety and soundness issue. Strategic risks in this case, the risk of not being able to provide or not

being able to offer the products and services that the market demands, is in the long term the most important risk facing the financial industry today. In our dynamic economy, if banks are not

able to offer new products, to evolve as the market evolves, they

will not survive as a healthy entity.’’ Ricky Helfer, former FDIC Chairman, said in 1997, ‘‘Modernization of the Financial System is necessary to achieve an efficient

and competitive financial services industry. Financial modernization should strengthen banking organizations by allowing diversification of income sources and better services to customers. The

lessons we draw from these events, which are major regional and

sectoral downturns, is that attempts to ensure safety and soundness of the Financial System, the Institutions must be allowed to

diversify.’’

And finally, I will share this. From a book entitled The History

of the Eighties: Lessons for the Future, it’s quoted, ‘‘The rise in the

number of bank failures in the 1980s had many causes which were

beyond the regulators’ power to influence or offset. These included

broad economic and financial market changes. The structural

weaknesses that inhibited geographic diversification and made

many banks vulnerable to regional and sectoral recessions.’’

The promotion of diversification geographically is not new. Other

financial regulators have noted it, commented on it and served as

the basis for far broader financial modernization efforts that took

place last year.

Thank you, Mr. Chairman. I’m happy to answer any questions.

[The prepared statement of Mr. Reyna can be found in the appendix on page 50.]

The CHAIRMAN. Well, thank you very much, Mr. Chairman.

Let me just comment briefly on some of the testimony that you

did not have an opportunity to present, but which is a part of our

record, which is important in the history of this subject. And those

19

who experienced the Congressional and banking trauma of the

1980s are certainly aware of those items you touched upon during

that time because the savings and loan crisis consumed much of

the attention of the Congress for years and the Farm Credit crisis

for at least the better part of three-years, as I recall.

And in 1987, at the time the new legislation was being formulated and was finally passed, in the Chart that you have presented,

derived from the Department of Agriculture data, you had a crossover in which commercial banks took a larger share of farm debt.

And they’ve continued to maintain that to the present.

Prior to that time, the Farm Credit System, when I take a look

at this chart, had from 32- to 35-percent of farm debt. Essentially

in those days, commercial banks were more in the 24, 23 category.

But now, it’s about 41-percent for commercial banks, 26-percent for

Farm Credit, more or less, as you’ve presented it. And there is no

particular reason why that necessarily would change. But these are

the two largest sources. Life insurance company loans are another

large source, and have not been mentioned today, roughly 23-percent. And then various other individuals and situations, in some

States more prominent than others.

You’ve mentioned in your own testimony, portions that you did

not recite this morning, the Farm System’s outstanding loans were

16.3-percent to farmers less than 35-years of age. That is a very,

very important item. The testimony before our committee about the

aging of American agriculture, the opportunities for young farmers

to get into it are a very, very important factor, and you’ve recognized that, as would be appropriate for the Farm Credit System.

And 20.7 percent were beginning farmers with 10-years of experience or less. That might include some of the group that were 35

or younger. But once again, a critical element in terms of the dynamism of American agriculture if there are to be replacements out

on our farms. And 57.9 percent were to farmers who had annual

sales of $250,000 or less. As we’ve heard in previous testimony, on the restructuring of American agriculture, the $250,000 level is significant, because only 8-percent of American farm entities have

sales of more than $250,000. But they do arguably about 85-percent of the business.

So we have an extraordinary dilemma as we begin to take a look

at another Farm Bill. As most Americans are not aware, the high

degree of that which is done in livestock and crops is by a very

small number of people.

But in any event, the bulk of your loans are to those who are less

than the 8-percent, who are very important, and who really need

credit and one could argue, the most commercially viable of the

farms, the ones from which most income is derived by those farmers from the farm, as opposed to almost each of the entities that

is smaller.

Now, the dilemma you point out later on is that given the lack

or the decline of income coming from farms in the last two- or

three-years, and some can cite longer periods in certain parts of the

country, this has put some stress upon lenders such as your institutions, who in fact are feeling this pain and the uncertainty of repayment. There was a sigh of relief in many banks, whether they

were private or Farm Credit, when the double AMTA payments

20

were received this year, and people, country banks, whichever form

they were, got paid. And it led to a feeling that there might be another year for many of these entities who were in jeopardy.

But as you point out, this is a problem. If this is the bulk of your

portfolio and it’s under some stress, in other words, there may be

a declining spread in terms of interest rates, and all you have been

building ever since 1987, a substantial amount of capital, which

gives you safety margins, that cannot necessarily be taken for

granted. So you have cited other banking authorities outside agriculture who talk about spread of loans, as opposed to the concentration that you have.

This is a part of our dilemma. Clearly, the Farm Credit situation

was set up to help farmers, to help people in agricultural America.

And one of our debates throughout the 1980s was, are they being

well enough served, are there enough sources. In some counties of

America, the answer apparently was no. So the question is, how do

you fill in that void, so that all of us, wherever we are, receive credit because a lot of agriculture is remote by definition. There are not

large population centers, as there are in urban areas.

So on the one hand, the idea is to provide a Federal entity that

helps everybody. On the other hand, we want that Federal entity

to remain viable. And that was the dilemma we faced in the mid1980s. There wasn’t going to be much credit if the whole thing collapsed.

So as a result, as you recall, as a historian of all this, there were

estimates before this committee that as much as $11 billion of

guaranteed loans, or some type of Federal safety net, might be necessary to work out over the course of many years the problems of

the Farm Credit System.

Now, my recollection is that fortunately, it took about $1.4 billion, and those loans were fairly promptly repaid by the System, to

its credit and to all who were involved in it. So as a result, all the

dilemmas that faced the savings and loan and the fallout from that

did not attend this, and that’s a credit to the Farm Credit System,

it’s a credit to this committee and our House counterpart and others who really worked line by line through that legislation for the

better part of a couple of years. And it has worked well since.

But now you come today and you point out there are some

trends. And they are disturbing ones to all of us. Fewer farmers,

fewer entities at all that are out there. And those who are young

are especially troubled because of the difficulty of capital accumulation. And maybe through our own farm policies an increase in land

values every year now for several years. So that if you are in a buying mood, you’ve got more of a problem, and more of a credit problem, certainly.

So I sketch in all this as you would have if the Committee had

asked you to recite the whole paper. But I think these are important facts and they are part of the record.

Now, having said all that, it’s your statement, as I understand

it, that you believe you have statutory authority to issue this rule,

to call for the 30-day comment, as you have, to listen to what everybody has to say, take seriously these comments as well as our

hearing today and the comments that may be made, and then to

21

proceed. Is that essentially your position or do you want to comment on that?

Mr. REYNA. Senator, I think you’ve accurately captured the essence of my comments. It has been the FCA’s practice since at least

1933 to issue exclusive Charters. In more recent years, as I mentioned, there has been some over-chartering of territories when it

made sense to do that as a result of mergers and consolidations.

What we would do with this rule is to end that practice. The statute does not prohibit the issuance of a National Charter, nor does

it require the issuance of exclusive Charters. It’s been a regulatory

or administrative practice.

The CHAIRMAN. In his testimony, Congressman Leach was highly

critical of the activities you took last year, feeling that this did not

bring about a rulemaking process or 30-days and so forth. But nevertheless, you did not proceed. And when we visited earlier this

year, as you recall from our conversation, which is a confidential

conversation, but this part of it, I think is fair to say, that I

thought there would be some concern if this occurred without there

being a formal rule and a 30-day period. You shared that view.

And I indicated we would probably want to have a hearing,

which in fact we are having, because I believe this is good public

policy to do, so that everybody understands the situation. Whatever

may be the history, as you mentioned, back as early as 1994, long

before your tenure or that of Ms. Jorgensen on this board, there

was comment about this geographical situation. So it’s not an entirely new item, it sort of spreads over six- or seven-years.

But nevertheless, it has probably come for reasons you’ve suggested in your testimony today, namely, real problems out in farm

country with your clients, with the spreads, with districts that

maybe have, as you point out, only two or three crops that are

prominent. And if those two or three are in very difficult shape simultaneously, so might be the Farm Credit entities who are servicing them.

So for all these reasons, you’re suggesting it is prudent now, not

in a time of crisis like the mid-1980s, or with the whole thing underwater, that we try to think about this. But nevertheless, it has

its controversies. That’s the reason we are all being heard and

many more will be heard. And you heard from a lot of people last

year, as it turned out.

But I appreciate the opportunity to explore these situations, for

you to make your case as well as others who have studied this,

have a strong interest in it to do theirs.

I’d like to call upon my colleague now, Senator Crapo, for his

comments and questions.

Senator CRAPO. Thank you very much, Mr. Chairman.

Chairman Reyna, one of the issues I want to get into is just what

the original Charter and purpose of the Farm Credit System was

and is, and whether this proposal is going to change that at all. As

I understand it, and I’d like you to correct me if I’m wrong on this

or elaborate, but the original purpose seems to have been to provide a lower cost sort of access to capital for farm producers by providing a system of financing in which there is, because of the Government guarantees, a cheaper access to capital.

22

And that this effort was not intended to result in creating a new

competitive entity that would be competitive with the private sector, but that the loans were intended primarily to be available for

those who could not get financing in the private sector’s general

system. Am I correct about that?

Mr. REYNA. Ninety-five percent.

Senator CRAPO. Okay, why don’t you correct it.

Mr. REYNA. Unlike the programs that USDA operates that serve

as lender of last resort, the Farm Credit System doesn’t have a

Congressional mandate to do that. The mandate that Congress has

issued to the System is to serve all types of agricultural borrowers

that have a basis for credit, large, medium and small. But they

have to have a basis for credit, which means they have to have repayment ability.

So the programs or the products that are offered by the Farm

Credit System are not specifically targeted at limited resource or

any other type of small borrower.

Senator CRAPO. So there’s no requirement under the law as you

see it that there be a lender of last resort element in the activities

of the Farm Credit System?

Mr. REYNA. No, I agree that there is not. I also think that the

System as devised by Congress is working. USDA and its programs

serve a very important role in the marketplace. Before this position

I served as a Farmers Home director in California, running those

programs for a period of time.

The Farm Credit System does not have the same mandate or

mission. It is to provide a dependable and competitive source of

credit for agriculture in rural America. That is outlined in the preamble of the Act. And I think that the mission is still valid today,

the need is still valid today.

Senator CRAPO. One of the criticisms that is very aggressively

made by those in the private sector who provide agricultural financing is that it’s not fair for the Federal Government to basically

provide support or subsidy to a Farm Loan System and that loan

system then be in direct competition with the private sector. How

would you respond to that criticism?

Mr. REYNA. I understand the concern. But contrary to what some

might suggest, I actually think that the presence of the Farm Credit System as a Government-sponsored enterprise in the marketplace actually creates lower rates for the borrowers. And I think as

a regulator, and when you’re judging public policy, you have to look

through to the ultimate borrower, the ultimate beneficiary of whatever change or modification is being proposed. I think you have to

see what impact it’s going to have.

Whether it’s good or bad per-se for a Farm Credit institution or

a bank or other type of lender is secondary to the benefit that ultimately would accrue to the borrower. So if you’ve got a farmer out

there that would benefit from competition as a result of the modification or proposed rule, I would say it’s a good policy.

Senator CRAPO. To shift gears for just a moment, do I understand your testimony correctly to be that it is your belief that if

this proposed rule is not adopted that the safety and soundness of

the System would be jeopardized?

23

Mr. REYNA. I’m saying that currently, with the narrow geographic territories and the commodity concentrations that exist in

the portfolios of Farm Credit Institutions, that is not healthy. As

a regulator, I have to sit here and tell you, that is not healthy to

have. And I would be derelict in my duty if I did not come before

Congress, this committee, and tell you that it is of the utmost importance to provide for the geographic diversification of these institutions, and more so when times are good, because when times are

bad, it will be far too late.

Senator CRAPO. Another argument that is made against the proposal which you’ve heard some here earlier, in the testimony of

Chairman Leach, is that there is a belief that the proposal will expand the lending activities of the participating members of the

Farm Credit Service. In essence, you’ve probably heard that there

will be loans provided in a broader arena of activities and if I understood your testimony, you indicated that no new products or

services would be authorized by this rule.

Why is it that this argument is being made? There is a very

widespread belief that this rule will result in significantly expanded new products and service activities.

Mr. REYNA. I can understand that there may be a concern, and

I would suggest that those that have the concern should actually

read the rule closely, because there are no new products or services.

I can only speculate, and this was before I joined this board,

there were lawsuits back and forth that involved the Agency and

its effort to redefine eligibility that competitors of the Farm Credit

System didn’t particularly like. So there is a fear possibly, a residual fear possibly, that this rule somehow, some way, broadens the

authorities, the lending authorities.

What you’re going to have in this situation is an institution that

has particular lending authorities today, it’s granted a National

Charter, and tomorrow has the exact same lending authority. So if

you don’t like the lending authorities that a System association has

today, you’re not going to like them tomorrow, because they’re exactly the same.

Senator CRAPO. Just one last question for clarification. It’s my

understanding that a lending association can lend outside its geographic area now, with permission of the resident lending association. Is that correct?

Mr. REYNA. That is absolutely correct. It is also more costly in

some instances to do that, and it’s not always granted. If I could

just use an example, if you and I are lenders, and you want to

make a loan to a farmer in my territory, in the current System

structure, you’d have to come to me and tell me, I want to make

a loan in your area, and I need your approval to do that. I could

say no. I might not even be making a loan to that farmer, but I

could say no. You wouldn’t be able to serve that farmer, I’m not

serving that farmer, so the farmer is unserved.

That happens today. Unserved by the System, I should say. The

farmer might be able to go to a bank or some other type of lender

and get credit, or USDA. This board did take action to allow the

System to participate in loans that are made by banks, by the nonSystem lenders, so they would share the risks and the profit that

24

goes along with that. And we did away with the consent and notice

that’s required for those types of loans that are made. That is currently in court and has yet to be resolved.

Senator CRAPO. Thank you.

The CHAIRMAN. Thank you very much, Senator Crapo.

Chairman Reyna, as you have heard, Congressman Leach

stressed from his experience as Chairman of the Banking Committee some reservations people have in financial circles about the

changes in what might occur. And they touch upon another theme

that Chairman Leach did not bring up, but that many have around

this table, that is agricultural concentration generally.

Now, last year, the Committee took action to try to provide for

much more antitrust authority and scrutiny of agriculture by having a person in the USDA. There are some on the Committee who

feel we ought to appropriate one of the positions and the Department of Justice should move you more aggressively in this area.

But from hearing to hearing, a great deal was said about concentration, in the Cattle industry, in the Hog industry, in the Poultry industry and others.

Today, Congressman Leach mentioned specifically two companies

for illustrative purposes. He didn’t allege that they’re making loans

or dealing with you, but Cargill and John Deere, for example, two

large and well respected American firms. And at least I gathered

his testimony was that these firms might find it useful to begin

picking up ties with Farm Credit System, and might do so in a fairly wholesale way.

Can you offer any illumination on what their possibilities are?

Mr. Leach was saying they haven’t maybe thought about the law

yet, they haven’t see, or the rule promulgated. But once they do,

not only for these two, but for a whole raft of fairly large firms in

America, ideas may light up as to the potential of this. And therefore, whatever might have been the best intention of Farm Credit,

the implications of activity would be something else.

Can you offer words of assurance, neutrality? What sort of

thoughts do you have?

Mr. REYNA. The first thing that occurs to me is that the particular scenario you just outlined could occur with or without National

Charters. This rule does not preclude or enhance the ability of a

Farm Credit institution to enter into an alliance or a type of partnership that you’ve described.

The CHAIRMAN. So it’s neutral on the concentration issue, as

we’re hearing it, from any form?

Mr. REYNA. Correct.

The CHAIRMAN. Ms. Jorgensen, you’ve sat silently through all of

this. Let me just ask you to speak up if you have something to say.

[Laughter.]

I appreciated very much your statement, which speaks for itself

very eloquently, and is a real contribution to our record. But before

we conclude work of this panel, I wanted to acknowledge your presence and to ask you to speak if you would like to.

Ms. JORGENSEN. Well, thank you very much. I appreciate being

here, and the Members of the Committee.

Chairman Reyna’s statement speaks well for what the Board discussed and the position of the Board, and I really don’t have anyVerDate 11-MAY-2000 10:34 Jan 17, 2002 Jkt 074343 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 C:\DOCS\74343.TXT SAG1 PsN: SAG1
25

thing to add. And as you mention, I did present a statement, I

didn’t present testimony.

I’d be happy to answer any questions at this point.

Thank you.

[The prepared statement of Ms. Jorgensen can be found in the

appendix on page 66.]

The CHAIRMAN. Your statement will be made a part of the

record, so that it will be testimony for this hearing.

We thank both of you for coming and for your service. Again for

the record, and for those who follow this board, there are at prime

strength three members. So you will be joined hopefully with a

nominee of President Bush at an early time. I would just pledge

on our part, as I have told you both privately, that we will act upon

that nomination as rapidly as possible, because boards work best

when they have their full membership.

We have had this problem with the CFTC Commission Board

from time to time, of vacancies, one or two or thereabouts. So we

will try to encourage the Administration to take this as seriously

as all of us have to date to get another member to help you.

We thank you both for coming and for your testimony.

Mr. REYNA. Thank you, Senator.

The CHAIRMAN. The Chair would like to call now a panel comprised of Mr. Bobby D. Williams, a grain farmer and board member

of the Heritage Land Bank of Tyler, TX; Mr. Jack Webster, President and CEO, Farm Credit Services of America in Omaha, NE;

Mr. Phillip Burns, Chairman of the Farmers and Merchants National Bank of West Point, NE; Mr. Dale Leighty, President of the

First National Bank of Las Animas, Las Animas, Colorado; and Dr.

Peter Barry, Professor of Agricultural Finance at the University of

Illinois in Urbana, IL.

STATEMENT OF BOBBY D. WILLIAMS, GRAIN FARMER,

CHAIRMAN OF THE BOARD, THE FARM CREDIT COUNCIL

Mr. WILLIAMS. Good morning, Mr. Chairman. Thank you for the

opportunity to appear before you today to discuss the Farm Credit

Administration’s proposal in regard to the regulation to permit

Farm Credit System institutions to seek National Charters.

I’m Bobby Williams. I’m Chairman of the Board of the Farm

Credit Council, which is the National Trade Association representing the Institutions of the Farm Credit System. I also serve as a

member of the Board of the Heritage Land Bank, ACA headquarter

in Tyler, TX. However, today, Mr. Chairman, I would like to address the Committee from the perspective of my primary occupation as a farmer.

The CHAIRMAN. Let me just interrupt for a moment, Mr. Williams, because you got started before I got everybody all comfortably seated.

Mr. WILLIAMS. I’m sorry, Mr. Chairman.

The CHAIRMAN. That’s all right. I was just going to greet you and

indicate that if possible, to confine your testimony to five minutes.

We’re not in a great hurry today and in the event you cannot get

done in five-minutes, that will be fine. But if you can, that would

be helpful, then we will begin questioning and the dialogue, really,

of our distinguished panel.

26

We’re delighted that you’re here, and please proceed. I apologize

for the interruption.

Mr. WILLIAMS. I noticed that when Mr. Webster gave me a hard

look, Mr. Chairman.

[Laughter.]

With our son, we currently farm about 3,200 acres near Wolf

City, Texas, which is near Dallas, Texas. Not only am I your typical Farm Credit borrower, I’m a typical family farmer. I’m not a

large conglomerate or a huge integrated operation that some have

suggested is the prime focus of the Farm Credit System. I can assure you that I’m the norm in our portfolio, and not the exception.

Mr. Chairman, before I discuss the National Charter proposal, I

want to thank you and your colleagues for what you’ve done for agriculture. I can tell you from a very personal experience that had

it not been for the aid that you provided farmers and ranchers in

the last few years, our ag economy would be in a very severe economic depression. We certainly thank you and we applaud you for

what you have done.

I have borrowed from the System since 1975. Over that time, I

have seen a lot of change——I’ve served as a director for over 20-

years——change in agriculture and change in the Farm Credit System.

Mr. Chairman, I hear a lot of accusations about the System and

what we’re doing and how we’re trying to pull away from serving

family farmers, pulling away from serving young and beginning

farmers. It’s interesting to me that those accusations all come from

those outside the Farm Credit System and they really don’t understand how we operate or they would really just like to see us go

away. I would challenge anyone that can believe these accusations

to come and spend some time with us at our board room in Tyler

and listen to the concerns expressed by those board members and

really listen to what we have to deal with on an ongoing basis.

Being a director of a System institution imposes on me the responsibility to make sure that the present and future generations

of farmers and ranchers have the option of being served by a cooperative financial institution that they own. To accomplish that,

change is necessary. Over the past couple of years, change has

been constant for our association. We have merged, we’ve converted

our association from being an agent of the Farm Credit Bank of

Texas, we were operating as a Federal Land Bank Association, to

being a direct lending, Federal Land Credit Association and we

have just completed our conversion to an Agricultural Credit Association.

Even with those changes, we recognize that maybe we have not

done enough to ensure that our customers are insured the best

service that they deserve. Our motive in this has not been to move

away from serving agriculture, Mr. Chairman, quite the opposite.

Our motive has been to structure a modern financial institution

that can effectively serve its stockholders, the present ones, and be

there to serve the next generation.

I’m very proud to tell you that when our association became an

ACA, and gained the authority to extend operating lines of credit,

those production credits, our son, Eric, who is a seventh generation

27

farmer from Wolf City, was the Institution’s first customer. That’s

my motivation for being here today, sir.

The Farm Credit Administration has proposed that System institutions have the flexibility to obtain National Charters. This represents a change, but it’s not a change that impacts who we are

eligible to serve or our cooperative structure. It’s just a change that

will allow us as directors and allow our management teams to have

another option.

This regulation means flexibility, flexibility for our institutions.

But more importantly, it gives flexibility to our borrowers, the

farmers and ranchers. With this regulation in place, I have the possibility of having another option, another choice of lenders, and I

really like that.

Mr. Webster will address a number of issues in greater detail.

There are two things I want to emphasize. First, whether a Farm

Credit Institution serves a limited number of counties, as in the

case of my institution, or many States, as in the case of Mr. Webster’s institution, or the entire country, which is permitted under

the rule, or would be permitted under the rule, the control of those

institutions is a responsibility of the Board of Directors of those institutions.

Second, we’re not going to ignore our responsibility to continue

to work with young and beginning farmers. If anyone is sensitive

to the needs of young farmers, it is parents who are farmers and

who direct these institutions. From experience, we know that credit

is not the solution for a young farmer, but it is a tool, and we’ll

continue to make sure that the appropriate tools are in place for

young and beginning farmers, and that their needs are addressed.

Sir, I see I’m out of time. If I may have one additional minute.

Mr. Chairman, to that end, I want to use this opportunity to

make the Committee aware of a major new effort that is being

launched by the Farm Credit System Foundation. Within the next

week, the Foundation will be launching an internet- based project

to reach thousands of young and beginning farmers to provide

them a vehicle to express their views regarding the existing barriers to their success in agriculture. Our goal is to develop the first

comprehensive picture of young and beginning farmers far beyond

what the Agricultural census of the USDA can provide.

We will make the results available to you so that in your efforts,

as you write a new farm bill, you will have far more information

than you’ve ever had to deal with the needs of this critical segment, which is the future farmers and ranchers of America. the

Farm Credit System Foundation is pleased to sponsor this effort,

and we’ll be happy to provide you with a full briefing at your convenience.

Again, thank you for the opportunity to appear before you today.

After the completion of Mr. Webster, we will be glad to take any

questions that you may have for us. Thank you, sir, and excuse me

for starting before the time.

[The prepared statement of Mr. Williams can be found in the appendix on page 68.]

The CHAIRMAN. Well, thank you very much for your testimony,

Mr. Williams. We will ask each of the five panelists to make their

28

remarks before we start the questions, so we will have the full colloquy at that point.

I would just interject at this moment that clearly, you’ve offered

the Committee some information of more general import with regard to the Farm Bill. And I would hope that each one of you who

are here today, as you have those opportunities, will do that. This

is a time of the gathering of the best wisdom that we can from people all over America on what the facts are on individual farms or

collections of people as either young or old or what have you.

So that kind of data would be very, very welcome.

Mr. Webster, we’d like to have your testimony.

STATEMENT OF JACK WEBSTER, PRESIDENT AND CHIEF

EXECUTIVE OFFICER, FARM CREDIT SERVICES OF AMERICA

Mr.WEBSTER. Thank you. Good morning, Mr. Chairman and Senator.

My name is Jack Webster. I’m President and Chief Executive Officer of Farm Credit Services of America.

I’m appearing today on behalf of the Farm Credit Council, the

National Trade Association representing the Institutions of the National Farm Credit System. Farm Credit Services of America provides loans and related services to 43,000 agricultural producers in

Iowa, Nebraska, South Dakota and Wyoming. We’re headquartered

in Omaha. We’re a cooperative, owned and governed by the farmers

we serve. At year-end, we had over $5 billion invested in agriculture.

Mr. Chairman, before I address the subject of the hearing, I want

to echo what Mr. Williams said regarding the support this committee has demonstrated for American agriculture. Without it, conditions in the rural economy would be dire. We heartily support the

assistance you provided, and urge you to continue to address the

needs of agriculture, while markets remain depressed.

Thank you very much, Mr. Chairman, for calling this hearing.

We welcome the opportunity to come before the Committee and

talk about what we are doing to improve our service to farmers and

ranchers. The System is chartered by Congress for a very specific

reason: to serve agriculture. I started in the System in 1974, and

I remember back then what the Act said, and this is from memory,

but it’s to improve the income and well-being of the American

farmer and rancher through the extension of sound and constructive credit.

So I was challenged a little bit by some of the comments earlier,

and I’m glad it was asked about. But the mission is not limited by

the term modest means. We look for sound, constructive credit to

improve the farmer’s capability in the field. That is our mission.

It’s set out clearly in the Farm Credit Act. We are cooperatively

owned and controlled. We’re a permanent system of credit for agriculture which will be responsive to the credit needs of all types of

agricultural producers having a basis for credit.

To accomplish this mission, we are expected to keep the Institutions of the System modern, efficient and competitive. We are expected to provide farmers and ranchers a choice amongst lenders,

and we must have the wherewithal to be a reliable source of credit,

able to serve all types of farmers, in good times and bad. The curVerDate 11-MAY-2000 10:34 Jan 17, 2002 Jkt 074343 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 C:\DOCS\74343.TXT SAG1 PsN: SAG1
29

rent service territory limitations under which we operate date back

to the 1920s. The regulator at that time made an administrative

decision that agriculture as it existed then would best be served by

institutions with limited service territories. Back then, a farmer’s

geographic location, where they lived, where they farmed, was the

determining factor in their choice of a lending institution.

Needless to say, 80-years has brought a lot of changes to agriculture and to the financial services industry. Today farmers buy

inputs from, gather information from and market their products to

entities all over the globe. The internet provides them instantaneous access to the global marketplace. Globalization has brought

with it the promise of expanded markets and the challenge of global competition, and yet the farmer-owners of the Farm Credit System have seen their lending institutions remain geographically limited, in a global economy that knows no geographic limitations.

They face arbitrary and outdated restrictions that no longer make

sense in our modern world.

National Charters will ensure that farmers and agribusinesses

have access to the broadest range of lenders. The National Charter

regulation will provide farmers and agribusinesses with a choice of

lenders to best meet their needs. Farm Credit System lenders are

limited to serving agricultural and rural communities. As essentially single sector lenders, we face concentrated risk. Unlike other

lenders, we cannot move away from agriculture when the economy

softens. We are here to serve agriculture and rural America in good

times and bad. We work every day to mitigate the risk inherent in

single sector lending.

Farm Credit single sector risk is further concentrated in many

cases by geographic risk. An institution can find itself facing a territory-wide drought or similar agricultural catastrophe. By moving

beyond local geography, Farm Credit institutions can alleviate

some of this geographic risk.

National Charters will not change the cooperative nature of the

Farm Credit institutions. They will continue to operate on the concept of one stockholder, one vote. Farm Credit institutions will continue to be owned and controlled by their member customers.

Farmer control will remain a fundamental principle of the System.

An institution that receives a National Charter would be required to amend its current business plan to ensure that first and

foremost, it will provide loans and financially related services to

the customers in its originally chartered or local service area. The

conditions of the National Charter set forth in the proposed regulation would require an institution to recognize and act on its obligation to serve all eligible borrowers in its local service area.

National Charters will not change who is eligible to get a loan

from the Farm Credit. The National Charter regulation will provide no new lending authority for FCS institutions. The competitive

balance between Farm Credit and commercial banks will not be altered by this regulation.

It is important to remember that commercial banks have done

very well competing in agricultural credit markets. According to

USDA, commercial banks have gained market share in agriculture

credit markets in 12 of the last 15-years.

30

Mr. Chairman, thank you for the opportunity to testify today. We

strongly support the FCA’s proposed regulation. We believe it provides more choices for farmers, helps diversify risk in Farm Credit

institutions, and helps preserve Farm Credit’s cooperative structure. Importantly, we note that the FCA action does not alter the

competitive balance between Farm Credit and commercial banks,

and is fully authorized by law.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Webster can be found in the appendix on page 71.]

The CHAIRMAN. Thank you, Mr. Webster.

I’d like to call now upon Mr. Burns for his testimony.

STATEMENT OF PHILLIP BURNS, CHAIRMAN, FARMERS AND

MERCHANTS BANK, WEST POINT, NE

Mr. BURNS. Mr. Chairman and members of the Committee, I am

Phil Burns. I’m Chairman of the Board of the Farmers and Merchants National Bank in West Point, Nebraska. I’m pleased to appear today on behalf of the American Bankers Association, to participate in this important hearing to discuss National Charters for

Farm Credit System direct lending institutions.

We thank the Committee for holding this hearing, because this

proposal by the Farm Credit Administration represents a dramatic

departure from the way in which the Farm Credit System has operated for over 80-years and poses a real potential for harm to producers, taxpayers and to rural America. We urge Congress to stop

this process before it’s too late.

There are a number of factors to keep in mind when considering

this National Charter proposal. The Farm Credit System has assumed a diminished role in a market brimming with competitive

providers of agricultural credit. Banks and other private sector

lenders have more than filled the void left by the Farm Credit System. The National Charter initiative is reminiscent of the 1980s in

that the System is once again desperately trying to reinvent itself

in order to justify their continued existence.

This initiative would further the specific targeting of the Federal

subsidy accorded Farm Credit System borrowers to the largest,

wealthiest producers, those that need Government help the least.

Since 1916, System institutions have operated with clearly defined territories. As a Government-sponsored enterprise, they enjoy

beneficial Federal and State tax treatment, and have a distinct

competitive advantage through their access to lower cost lendable

funds. By abandoning clearly defined territories and the principle

of local ownership and control, the FCA would undermine the essential and core principles of the System. As a result, the question

becomes whether GSE status for the System continues to be appropriate.

National Charters will for the first time have System institutions

competing with each other. There is no credible justification for

sending a GSE on a new and reckless course of internal competition. For years, our members have complained to Congress and the

FCA about the pricing practices of the System institutions. We are

very concerned that with National Charters, System institutions

31

will engage each other in a disastrous round of lowball pricing that

will undermine the financial health of rural America.

The FCA would have Congress and the public believe that System institutions are shackled to an antiquated system of geographic territories, and that by eliminating geographic boundaries,

the System will be insulated from regional risk. The truth is that

System institutions have a number of options available that they

can use to diversify their loan portfolio, either geographically or by

commodity. System institutions currently have authority to lend in

any part of the United States with the concurrence of the System

institution that is serving the territory they wish to enter. System

institutions may use existing loan participation regulations to participate in any qualifying loan made by a non-System lender.

An examination of the proposed regulatory framework raises a

number of public policy concerns. First, we have great concerns

about the negative impact National Charters will have on small

and beginning farmers as System institutions seek larger, more

profitable loans at the expense of these borrowers. The FCA’s National Charter proposal will primarily benefit, large multi-State,

farm and ranch operations.

Second, the FCA reminds System lenders that there is a public

policy mission of the System to provide credit to all eligible and

creditworthy customers within their local service area. However,

the FCA proposes no specific enforceable or measurable regulatory

sanctions that would ensure that local farmers and ranchers continue to have access to the Farm Credit System lender. In fact,

they do not propose to restrict in any way non-local lending of System institutions. Specific limitations should be applied to a System

institution’s lending activities outside of their local service area.

Third, the FCA fails to examine the increased risks that are associated with a local lender venturing forth into new territories

without a solid understanding of the new region’s peculiarities. The

FCA fails to establish a case for how National Charters will alleviate the System’s concentration in lending to a specific commodity.

Instead of diversity in commodity lending, we believe that the result will be a continued focus on the same commodities but in other

geographic areas, and in fact, will increase concentration and single

commodity loan risk.

Fourth, the proposal would fundamentally change Farm Credit

System Institutions from the locally owned and operated institutions envisioned by Congress into national lenders with no local

perspective. The participation of local farmer and rancher borrowers and the management, control and ownership of the System

have always been central to its mission. The FCA should require

that the 425,000 owners of the Farm Credit System vote on the

question of whether their institutions should apply for a National

Charter.

The Farm Credit System was created at a time when there were

limited choices to secure credit for American agriculture. National

banks like mine did not have authority to loan money on farm real

estate in 1916. The world has changed much since then. Today

seed companies, equipment manufacturers, fertilizer producers, life

insurance companies and foreign banks are all aggressive providers

of agricultural credit. The fact that these options exist raises the

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question, why should the American public remain on the hook for

the reckless activities of a retail lending, tax- advantaged GSE that

has clearly targeted its lending to benefit large, wealthy farmers

and ranchers.

Given their track record of unsafe and unsound lending gin the

past, and the lack of enforcement on the part of the regulator, we

urge Congress to stop this process before it’s too late.

Thank you for allowing us to be here. I’ll be more than willing

to address any questions at the appropriate time. Thank you.

[The prepared statement of Mr. Burns can be found in the appendix on page 76.]

The CHAIRMAN. Thank you very much, Mr. Burns.

I’d like to call now on Mr. Leighty for his testimony.

STATEMENT OF DALE LEIGHTY, VICE CHAIRMAN, INDEPENDENT COMMUNITY BANKERS OF AMERICA; PRESIDENT, FIRST

NATIONAL BANK OF LAS ANIMALS, LAS ANIMAS, CO

Mr. LEIGHTY. Thank you. I’m Dale Leighty, and I’m here today

representing the Independent Community Bankers of America.

Thank you for conducting this hearing.

Mr. Chairman, the old perception that bankers and the Farm

Credit System can’t agree on anything is not true. We agree with

the many FCS Associations who oppose this proposal. I ask that

the hearing record include these sample letters of opposition. The

bottom line is that the proposal is such a fundamental change with

such major negative public policy implications that it should be

thrown on the scrap pile of bad policy ideas.

[The information referred to can be found in the appendix on

page 107.]

FCS associations express concerns that this new direction is a

dramatic change in the FCS that would benefit only the large FCS

lenders at the expense of the smaller ones, would hurt the cooperative nature of the FCS, and undermine service to family farmers.

One Farm Credit System association wrote that in their Farm

Credit district, a survey showed that more than a majority of the

Associations are opposed to the National Charter approach.

With such opposition, we ask, why is FCA only providing a 30-

day public comment period? The basis for much of the opposition

to this proposal is that there is little, if any, need for this proposal.

The System already has mechanisms in place, as has been mentioned earlier, to allow for customer choice through granting routine concurrence for borrowing and the use of reciprocal territory

agreements, which ensures customers have choices.

Also, the System can already diversify risk if institutions choose

to use available authorities. For example, associations can achieve

diversity both across geographic regions and across commodities by

sharing loans with other associations, so-called loan participations.

Loan sharing allows associations to share the profits or losses of

their loans, and can be done anywhere in the U.S. Participations

have the added advantage of relying on the local association’s

knowledge of the customer base, and various risk factors inherent

in that particular geographic region. And they won’t drive out local

lenders.

33

In addition, the USDA has loan guarantee programs and Farmer

Mac has a secondary market program to purchase loans. Both of

these are in place to help lenders reduce risks. Yet USDA economists report that FCS has not utilized the USDA loan guarantee

programs to any significant degree.

Mr. Chairman, why adopt this proposal when FCS institutions

are currently not utilizing existing risk reduction tools? This proposal completely ignores other risks that result from venturing into

unfamiliar geographic areas and climates where they have little, if

any, previous lending experience. And why does it make sense for

associations to compete, when competing associations are jointly

and severally liable for each other’s failures?

The board of one FCA association stated, ‘‘Risks could develop to

such a scope and scale as to trigger losses that would impact the

remainder of the System institutions.’’ Another wrote, ‘‘We have

seen too often where the efforts to build and agricultural loan portfolio by offering low market rates or easy credit terms and conditions have led to problem loans, risky portfolios, and failed farming

operations.’’

Another wrote, ‘‘In our opinion, this is a classic safety and soundness issue, which puts member investment in System institutions

at risk.’’ In fact, one FCS association wrote, ‘‘We are convinced of

the following. Safety and soundness are being totally ignored.’’

These legitimate concerns need to be taken seriously, Mr. Chairman. This proposal will hurt family farmers, not help them. The

impacts are likely to include the need to offset low interest rates

made to the large borrowers by higher interest rates to smaller

farmers and reduced earnings to the associations and their stockholders. Also, when associations are forced to merge or go out of

business, there will be fewer credit choices.

The more profitable farmers in more profitable geographic areas

will be targeted, because the smaller loans will not be viewed as

cost efficient. In fact, they have pointed out that in those territories

where there is already limited over-chartering of FCS territories,

this is precisely what is now occurring.

Some FCS comments were, intra-System competition is for only

large loans, associations are only interested in soliciting large, out

of territory loans that have adequate volume to cover the extra expense of handling, and will contribute towards association efficiency, cost per dollar loaned. There will not be any competition for

the smaller loans, as they are not cost efficient. Competition for the

large loans will result in reduced interest rate spreads for these

loans, and an offsetting increase on small and marginal loans.

Is this the type of policy you want in place for rural America and

for your family farmers? Is this the role you have envisioned the

Farm Credit System playing?

Local service area plans are insufficient. Yes, the FCA has said

they will require local service area plans, or LSAs, to supposedly

ensure a commitment to the Association’s existing territories. Requiring LSAs in the first place simply gives credence to all the arguments against them, especially the arguments that National

Charters will only foster cherry picking. Why else would LSAs be

required?

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But will LSAs be sufficient? Answer: no. They are based on self

assessments and self evaluation by the Association applying for a

National Charter. LSAs do not require any targeting of young, beginning or low income farmers. So the focus on out of territory

lending is totally geared to large credits. There are no requirements, no portfolio goals, for example, that struggling family farmers by the primary objective for venturing into new territories.

Further, the policy does not increase service to low income farmers within LSAs by the local lender. It only requires a plan be in

place, but provides no criteria for the plan, no goals, nothing measurable, meaning, business as usual. The new policy allows the associations to self-assess themselves, as part of their application, and

report on how good of a job they feel they are doing in their local

service areas.

A few questions. Why are there no portfolio limitations on the

amount of lending activities the associations can do outside of their

LSAs? Why is FCA proposing local associations need to go outside

of their district bank territories? Will there be transparency and

open public scrutiny of these LSAs, or will they be hidden from the

public’s view? If an association closes down, who serves the LSA?

Who makes up the loss of local community investment, now that

the local association will need to divert resources to fight the incoming competition from non-LSA lenders? Why is there no requirement that the non-LSA lenders be required to make a financial commitment to the community where they are seeking loans

from? Who makes up the loss to the local tax base when large taxadvantaged GSE privileged lenders take away large loans, since income taxes won’t go into the local community?

Will the same level of income taxes be required to be paid to the

community where the large GSE lender is located as they would if

made by private sector lenders? Obviously not. Does this mean

local tax increases to maintain the tax base in these communities?

And who makes up for the loss of local economic activity when

funds are not recycled through the rural community where the borrower is located?

One association wrote, ‘‘Even with the LSA requirements, a likely result over time will be for associations to place less emphasis

and focus on smaller, less profitable loans in marginal agricultural

areas, and increase efforts in areas with stronger agricultural and

larger, more profitable loans.’’

Unfortunately, the removal of boundaries could result in fewer

associations due to interest system competition, and therefore lead

to higher interest rates over time. Obviously this would not be beneficial for our customers.

Mr. Chairman, it is inconceivable that Congress wants to provide

less help and poorer service to family farmers. But both perspectives, FCAs and opposing FCS associations, can’t be correct. They

are mutually exclusive. It is a matter of basic economics. Family

farmers will not be targeted by out of territory lenders under this

proposal, because it will cost more to underwrite service and monitor their loans made from many States away.

To be viable, local lenders must be able to lend to a broad cross

section of constituents in their market. They can’t be profitable

lending only to the marginal or less profitable customers. But this

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is a prospect that many local lenders would face, since the large,

aggressive FCS lenders would engage in predatory pricing to

snatch away the better farm loans.

This proposal has no monitoring or oversight controls to prevent

predatory pricing. FCA does little policing in this regard currently,

and this proposal only guarantees that the larger System entities

will undercut the market to get the business.

As one FCS association wrote, ‘‘We are totally opposed to the removal of geographic boundaries of System entities which would no

doubt promote predatory pricing and loss of local control.’’ Another

wrote, ‘‘Better rates and better terms will only occur if one of the

competing system entities is willing to earn less than the market

would dictate. Therefore, we are uneasy with the proposal in this

extremely competitive environment.’’ Section 1.1 of the Farm Credit Act, which states Congressional

objectives, is often cited by FCA. But this section has a proviso

which states, provided that in no case is any borrower to be

charged a rate of interest that is below competitive market rates

for similar loans made by private lenders. Yet FCA does not provide sufficient regulatory controls in this area to accompany their

regulatory proposals. The Act may need legislative changes to require better performance. And FCA should be conducting periodic

surveys of rates and making them publicly available.

FCA has admitted that they have not conducted a formal economic cost benefit or needs analysis of the impact of this proposal.

With such dramatic changes possible and likely, one would think

that would be required of the FCA. This raises the public policy

question of why small, locally based lenders, like our $98 million

bank, should be forced to compete with a multi-billion dollar Government sponsored enterprise. Does anyone around this table believe that the remaining multi-billion dollar GSE lenders need to

keep their tax advantages and low cost GSE funding access in

order to compete with my small depository institution? Is that fairness?

Many members of Congress will talk often in the months ahead

about our future trade negotiations with other countries, and will

stress the need not only for free trade, but also for fair trade. As

community bankers, we ask for the same thing: some basic fairness

in competition in the rural credit markets.

The Department of Treasury recently commented on this proposal, warning: ‘‘First, we believe the proposal would reduce the

focus of Farm Credit System associations, focusing on serving all

eligible borrowers in their local areas, and diminish the System’s

local cooperative structure. Second, the proposal would likely allow

a Government advantaged competitor to increase market share,

which in the long term could affect competitiveness in Agricultural

Credit Markets. We did not recommend National Charters or any

form of interest system competition. It might well diminish competition and innovation in the medium to long term, by driving

other competitors from the market.’’

Finally, I ask the Committee to be wary of arguments that FCS

needs this proposal because they serve a single sector. And please

don’t believe the statements that ‘‘FCS must continue to make

loans to agriculture when other lenders can abandon agriculture in

36

search of more profitable opportunities elsewhere.’’ These types of

statements completely mischaracterize this debate and our rural

agricultural credit markets.

FCS was given tax advantages and access to unlimited low cost

funding as a Government-sponsored enterprise, precisely because

they were created to serve a single sector, agriculture, and created

at a time in the early part of the last century when we had credit

gaps. Should FCS continue to receive GSE benefits if they now

want to focus on largest loans across the country? It becomes questionable, and don’t forget, they also get to choose who they lend to

within this sector.

A couple of years ago, FCA proposed a broad scope and eligibility

proposal which included allowing loans to be made to farmers and

agribusiness for both farm and non-farm purposes. It was modestly

scaled back due to complaints. Farm Credit’s non-ag lending already includes providing mutual funds, credit cards, student loans,

home equity loans which can be used for any purpose, vacation

loans, loans to dentists and anesthesiologists, for recreational purposes and on and on. This argument of being limited to a single

sector has worn quite thin, and it is clear that FCA wants to push

the expanded powers envelope even further in the future.

Where will this lead with National Charters? Will Cole Bank,

working through its direct lender associations, or will FCS banks

and lenders form national alliances with national car companies to

provide consumer auto financing for Ford or GM cars in towns of

50,000 and under population? What about financing all the consumer loans for Home Depot, home remodeling projects in rural

towns? What about teaming up with the national businesses to provide financing for furniture sales, office equipment, computers, if

they serve rural America?

In regards to other lenders abandoning farmers, let me state,

there are thousands of community banks serving agriculture. And

in most communities, there are several community banks competing for the same business in addition to other competitors. Community banks are not going to go seek profit opportunities elsewhere

by leaving our communities in tough times.

Mr. Chairman, FCA and the FCS, despite all the talk about

wanting more competition, have a terrible record for implementing

the other financial institutions program, intended by Congress to

allow banks, credit unions and other groups to access the funding

windows of the FCS. Only 24 exist, despite decades of statutory authority. We urge FCA to host a meeting of OFIs to gather input

and begin developing a working program.

National Chartering is fraught with problems. It dramatically

changes the structure of the System, will lead to rapid consolidation and loss of local control, encourages predatory pricing with no

controls, will lead to large, aggressive FCS lenders cherry picking

the best loans, with no specific targeting requirements to serve

family farmers. It could lead to alliances with large commercial

businesses for non-farm lending.

The System has been quite profitable as it is currently structured, generating over $1 billion in annual net profits for the past

decade. FCA should withdraw their proposal and promote options

that would be much less disruptive. This proposal raises serious

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concerns. We would be glad to work with the Committee and the

FCA in discussions to explore the needs of the Rural Credit Markets, especially the needs of beginning and low income farmers.

But we ask that community bankers be included in such discussions. Otherwise, FCA is making decisions that will have broad impact on all lenders and borrowers in Rural Credit Markets, but

only listening to a select few, even within its own constituency.

And that simply can’t be good for the whole of rural America.

Thank you.

[The prepared statement of Mr. Leighty can be found in the appendix on page 84.]

The CHAIRMAN. Thank you very much, Mr. Leighty.

The staff has certainly done a good job in inviting four very articulate witnesses, and we appreciate the testimony of each of you.

Now we will hear from Dr. Peter Barry, Professor of Agricultural

Finance, University of IL. I hope not an uncomfortable position,

having heard this debate presently. We look forward to your testimony.

STATEMENT OF PETER J. BARRY, PROFESSOR OF AGRICULTURAL FINANCE, CENTER FOR FARM AND RURAL BUSINESS

FINANCE, UNIVERSITY OF IL, URBANA

Dr. BARRY. Thank you, Mr. Chairman and Senator, other members of the Committee. My name is Peter Barry. I am a Professor

of Agricultural Finance at the University of IL, and Director of the

Center for Farm and Rural Business Fiancee.

Most of my career has addressed work in agricultural finance, including many projects and activities with industry groups, agency

groups and policy groups. Currently, for example, my colleagues

and I are finishing an assignment with the FCA about risk-based

capital requirements for Farmer Mac.

I have a long acquaintance with the National Chartering issue,

having completed a study in 1991 for the FCA entitled ‘‘Competition Within the Farm Credit System: Concepts and Options.’’ This

study conceptualized the issues and identified options, including

the currently proposed approach for intra-System competition, with

each option evaluated by a common set of criteria. Since it began

in 1916, the Farm Credit System has had considerable evolution,

including restructuring, new authorizations, contemporary management techniques, and an arms-length regulator. National Chartering is another step in this long-term modernization process.

My testimony addresses five issues: competition, risks, reliability,

cooperative organization and structural change, and regulatory considerations. Competition among System institutions should offer

more choices for farmers and enhance the competitiveness of rural

financial markets. Greater competition could especially benefit

parts of the U.S., the southeast, the northeast, parts of the west,

where historically strong branch banking systems generally have

been less committed to agriculture, in contrast to the more prevalent community banking in the midwest and plains. Table 1 in my

written testimony illustrates the differences in Farm Credit System

market shares and competitive positions across selected States and

regions.

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In going forward, the monitoring of commercial bank financing of

agriculture will be important as bank consolidations continue to

occur. For risks, National Chartering initially could bring greater

uncertainties about unfamiliar territories and about the collection

of information for new borrowers, thus giving value to institutional

discipline and regulatory oversight. Over the longer term, geographic expansions should add to the risk-bearing capacity of the

System institutions, perhaps yielding small reductions in farmers’ interest rates.

The FCS mandate for reliable lending and its cooperative organizations should also continue to constrain aggressive geographic expansion. Most farm borrowers prefer knowledgeable, established,

reliable lenders, which implies the need for major institutional

commitment to serving expanded territories. Concerns may also

arise about how National Charters could affect younger, smaller

and less wealthy borrowers. The dominance of the System’s farm

real estate lending in the past can skew its customer base more toward farmers who can afford to purchase and finance farm land,

in contrast to the practice by younger farmers, in Illinois, at least,

to lease most of the land they operate.

Extensive structural change in agriculture is making it much

harder to generalize about a customer base. As indicated by recent

initiatives, the System seems committed to further serve young, beginning and limited resource farms. Structural change of the Farm

Credit System itself has been rapid, with the pace of reductions of

lending associations exceeding that of commercial banks. A patchwork structure has emerged, in that at least two of the large multiState associations are larger than two of the Farm Credit Banks.

The National Charter concept could facilitate or motivate further

structural change. Perhaps it already has.

Regarding regulations for National Chartering, the FCA’s proposed rules published in the February 16 Federal Register squarely

address matters of safety and soundness, local service obligations

and effective business planning. A key implementation factor is for

the FCA to follow through effectively in examinations, reporting

and other regulatory processes, to ensure the system meets its

mandated mission.

Thank you very much for the opportunity to offer this testimony.

[The prepared statement of Dr. Barry can be found in the appendix on page 97.]

The CHAIRMAN. Thank you very much, Professor.

Let me just begin the questioning by raising a point I think that

Mr. Leighty has made, and that is that there appears to be some

opposition within the Farm Credit System to the National Chartering idea. And you cited, Mr. Leighty, as a part of your testimony,

a list of institutions that have expressed this. Maybe you would

like to say more about that.

But I’d like to ask Mr. Webster or anyone else to comment on

this. What about that? Is there a debate going on within the System? Is the testimony we heard today from those in Farm Credit

reflective of that, and can you make further comment or assertion?

Then I would like to hear from the Farm Credit witnesses.

Mr. LEIGHTY. I believe you have been provided with copies of letters, that is the source of those comments.

39

[The information referred to can be found in the appendix on

page 107.]

The CHAIRMAN. But I think you implied that, as a matter of fact,

I jotted down that losses could jeopardize the entirety of the System, at least assertions were being made, apparently in some of

these letters or through other testimony you’ve heard. Is that a serious concern, that the entire system could be jeopardized by this

principle we’re debating today?

Mr. LEIGHTY. That’s simply a perspective of one of the commenters of the Farm Credit System Associations that sent in a letter.

The CHAIRMAN. Mr. Webster, what sort of debate do you have

within your circles on this?

Mr. WEBSTER. Mr. Chairman, it’s interesting to have the bankers

quote our differences, but we have them. I would say that the focus

is on, whether we’re focusing on an institution or the farmer-rancher. I’ve listened to testimony this morning that talks about institutions.

We are a strong advocate of National Charters for one reason: it

puts the choice within the American farmer or rancher. Let them

choose who they want to do business with. And yes, that could

challenge some institutions, because that farmer may choose to do

business with someone who they believe has more expertise, better

programs, maybe just somebody they have a good relationship

with. And in fact, our association, which is a large multi-state, we

believe with the adoption of National Charters we in fact will lose

some customers to some adjoining associations. And we think that’s

okay.

In fact, we think if a farmer is near one of our borders and chooses to have a relationship with another lender, other than ours, that

they should not have any red tape to go through. They’ll walk, and

we’ll learn from that. And we’ll ask why they went there, what

could we do to serve them better.

The CHAIRMAN. Dr. Barry, you’ve sort of summarized from your

extensive scholarship in the history of this, going from 1916 onward, various evolutions of the System that this current National

Chartering idea seems to be part of the flow. In other words,

maybe I don’t characterize correctly what you’re saying, but at

least potentially, a natural part of the evolution of the Farm Credit

System. Is that true, or does this have some abnormal or risky

qualities that are not really consistent with what might be sort of

a secular trend?

Dr. BARRY. I think it is true with respect to what’s happening in

financial markets. The System itself in the late 1980s allowed the

banks for cooperatives to merge if they so chose, and operate on a

national territory. Three of them did for a while, now there’s just

one. In commercial banking, we’ve seen significant breakdown of

geographic restrictions on banking. And with a phase-in over a long

period of time towards basically a national market now, if banks

choose to participate in it.

Of course, community banks still have a good niche. So as I mentioned in my testimony, it does seem like a natural evolutionary

process to me.

40

The CHAIRMAN. Mr. Williams, as a farmer and likewise board

member of a bank involved in the System, you are strongly in favor

of the rule proposal for reasons that you’ve stated in your testimony.

Mr. WILLIAMS. Yes, sir.

The CHAIRMAN. But as you’ve heard this debate, at least today,

are there problems that you can foresee in which conceivably, even

though this might be an advantage to farmers, the thoughts I think

Mr. Burns suggested or Mr. Leighty, that the Farm Credit Administration might even have been reckless in terms of expansion of

its activities in behalf of agriculture around the country, subsidized

by American taxpayers generally, advantaged by loan differentials

that were part of the System.

Do you have any response to that idea?

Mr. WILLIAMS. Mr. Chairman, I don’t see risk for our association.

In our district, the Tenth District, which covers five States, we do

not see any strong opposition to it. There may be some associations

opposed to this. I would like, if the Chair would allow me to, I

would like to share one example of how a National Charter might

work, and we’re not speaking of a National Charter to go into Nebraska, where Mr. Webster is. We’re speaking of going to an adjoining county or an adjoining association.

We live one half mile from the county line. My son drives 100-

miles to our association office. He can drive 14-miles to another association and get the same service. Maybe we should be satisfied

to drive 100-miles, but if he should have any dispute, any problems, should we be locked in forever to deal with that association

and drive 100-miles?

Another problem we’re experiencing is we have gone from 48

FLBAs, land bank associations, down to 16. We have formed ACAs.

There is a spider web of territories. We’re not sure where our territory is, because it’s overlapped with other ACAs, other FLBAs or

FLCAs. So we’re already into a problem of our territories. We see

this National Charter issue, or this National Charter, as a way to

correct a lot of those problems that we’re speaking about, getting

authority to make a loan in a county that is adjoining to us.

The CHAIRMAN. Mr. Burns, what would be wrong with that, letting the farmer drive 14-miles as opposed to 100?

Mr. BURNS. I would suspect, apparently there’s been for some period of time a history within the System that associations that

cover different territories, particularly that border one another,

have reciprocal agreements, that if you or one of your customers

comes to us, we can loan to them, if one of ours goes to you, you

can go to them. I would suspect that Mr. Williams’ son would have

a choice today to drive the 14-miles as opposed to the 100.

One, they have to ask for concurrence from the territory in which

they want to enter, and apparently they have to receive approval

for that. But that system’s in place already. There were in the comment periods that were issued both for this proposal and the customer choice proposal, from back a couple of years ago, a lot of associations that are opposed to this concept, in fact, the System institutions, actually made reference to that, and are concerned because there’s already a system in place to address those issues.

And yet, this would make it a national thing, expand it.

41

The CHAIRMAN. Senator Crapo, would you have questions for the

witnesses?

Senator CRAPO. Thank you, Mr. Chairman. I just have a couple

of questions.

It’s already been noted, and the Chairman picked up on it, that

there is some disagreement among the Associations themselves as

to whether this rule is a good idea. And this question is for any

of the panelists. Do we have an understanding about what the majority position is nationwide of the Associations, whether it’s in

support of or opposition to this rule?

Mr. WILLIAMS. Mr. Webster pointed out that we do have Council

support. We took a position some time ago on the National Charter

issue. The Council is made up of 21 representatives from 7 different districts throughout the United States, and this is a unanimous concurrence, that we support National Charters.

Going back to the Tenth District at home, we had a meeting

about 10-days ago, and our legislative officer provided an explanation about the hearing and what would be covered. And we did

not hear any opposition from representatives from those associations in regard to a disagreement or being against National Charters.

Now, I didn’t say that some may not be there, but they did not

verbalize that at the time.

Senator CRAPO. Right. If I understand you correctly, then, you’re

saying that you are not aware of what the total distribution is of

support or opposition nationwide, but from your experience, you

would believe there is support?

Mr. WILLIAMS. Support, yes, sir.

Senator CRAPO. Anybody have any other information or data on

that?

All right. Well, the only other question I have right now is for

you, Dr. Barry. You’ve heard the argument made here that one of

the things that’s probably, or that may happen as a result of this

proposed rule is that you will see internal competition among the

associations, and that the larger, more well-financed associations

will go in and cherry pick the good loans in the other areas, resulting in driving, at least as I understand the argument, driving those

who are not as well-financed out of business, and actually impacting competition in a negative way.

Could you comment on that argument?

Dr. BARRY. Well, it’s a valid question to raise. As I indicated, I

think there’s enough safety mechanisms in place as competition

might expand to protect against those kinds of things happening.

Again, many farmers prefer to develop good relationships with

lenders, and to be known and have their business understood well,

whether they are small, medium, or very large.

And so to the extent cherry picking might happen, that would

probably result in a natural migration of borrowers to lenders to

whom they really want to do business with, and to have the flexibility to do that.

Mr. WEBSTER. May I address that, Senator?

Senator CRAPO. Certainly.

Mr. WEBSTER. We’ve got to remember that we are controlled by

a board of directors that are farmers and ranchers from our terriVerDate 11-MAY-2000 10:34 Jan 17, 2002 Jkt 074343 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 C:\DOCS\74343.TXT SAG1 PsN: SAG1
42

tory. They’re not going to look kindly upon their institution pricing

products differently several States away than they’re getting locally. We see that as something that’s been thrown up. In fact that

just will not happen very well. If it does happen, the controls are

in place. Clearly our board of directors would be very concerned

about that practice, and it would not be condoned within our entity. And I think it would not be condoned elsewhere.

Mistakes could be made. But I can’t envision a practice of doing

that, that could gain the support on an ongoing basis from a local

board of directors. In fact, our capital was raised in Iowa, Nebraska, South Dakota and Wyoming. If we have a National Charter, I can assure you, the primary emphasis of the use of that capital will be Iowa, Nebraska, South Dakota and Wyoming.

Senator CRAPO. Thank you. I have no further questions, Mr.

Chairman.

The CHAIRMAN. Well, thank you very much, Senator Crapo.

This is not a question that any of you can answer, but I will raise

it for this comment period. Earlier, Congressman Leach indicated

that the incoming Administration of President Bush had asked that

we go slow on additional rulemaking until the Administration had

some opportunity to sort out all of the attempts at rulemaking or

regulations that were made during the last few weeks of the last

Administration.

This is neither here nor there with regard to the merits of what

we’re discussing today. Nevertheless, we are in that milieu of a

good number of regulations, some of them pertaining to agriculture,

forestry and other things we’re interested in, and which those who

are coming into authority, sometimes slowly, because the nomination and confirmation process takes some time with a new Administration.

This idea that we have today is, has been suggested historically,

not an entirely new one, but nevertheless, this is a significant rule.

One reason that I asked the Board members, Mr. Reyna and Ms.

Jorgensen, to participate in a hearing on this, even though the public as a whole may participate for 30-days, is really to elevate the

issue and its timeliness, so there would be opportunity for those to

offer this testimony, which you have, and which others may be

stimulated to do, having heard you.

Now, that is not a reason why the rule is either good, bad or indifferent. But it may very well be that other departments of the

Government, as they have competent people coming to those desks

and those responsibilities, will want to make a comment. I have at

this point no testimony, say, from the White House or the Department of the Treasury or other relevant people who sometimes have

things to say about rules. But that may come forward, and if so,

we will try to publicize that, so that will be a part of the overall

consideration of those who are taking part in the hearing today.

I would ask staff of Senators who have not been able to attend

to be certain that the testimony of each one of you, the full record

of the hearing we have to date, long before it can be officially published, be put in the hands of those Senators, so they will have the

same benefit, at least, of your written testimony. And staff, I know,

will ably give some gist of the conversation we had and the questions and answers.

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Do any of you have a final comment? If so, I would certainly entertain that.

If not, I express the appreciation of all of us to you for coming,

some of you at long distance and inconvenience, to be a part of this

hearing. I think it’s been an important one, and we’ve had very

good sharing of views.

The hearing is adjourned.

[Whereupon, at 11:59 a.m., the Committee was adjourned, to reconvene at the call of the Chair.]

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