McLEAN, Va. - Farm Credit lenders say proposals to tie individual loan amounts to the borrower's farm income, or to ban them from nonfarm lending, are unworkable.
At a public hearing last week at the headquarters of their regulator, the Farm Credit Administration, they argued that most farmers are now entrepreneurs with many nonfarm interests that are so intertwined with their farming operations that separating them is neither realistic nor possible.
All 12 of the Farm Credit lenders who spoke at the hearing said the agency should lift all restrictions on their lending authority. Preventing them from financing part-timers - a position the banking industry advocates - would cost them many of their best customers, the lenders said.
Bankers at the hearing countered that the Farm Credit System was chartered to lend only to farmers and that they have no business making other loans. All their loans should be tied to a borrower's farm income, the bankers said.
The Farm Credit Administration convened the June 26 hearing to solicit comments about its plan to overhaul its regulations about who can get a loan and what types of projects the system can finance.
The crux of the issue: whether the agency should continue to make a distinction between full-time and part-time farmers. Current regulations allow the lenders to lend to part-time farmers - defined as those who have a primary business other than farming - "on an increasingly conservative basis as the emphasis moves away from" full-time farming.
Michael M. Reyna, the Farm Credit Administration's chairman and chief executive officer, said its examiners are flagging an increasing number of loans made for commercial projects that far exceed the value of borrowers' farm operations. He also acknowledged that many of its lenders call the current regulations too restrictive.
Barry Cooper, the president and CEO of Farm Credit of Southern Colorado in Colorado Springs, said it was forced to reject an application from a rancher who had built ski chalets on land that was no good for farming.
"Needless to say, he was very upset and stated that it appeared that 25 years of loyalty on his part meant nothing to us," Mr. Cooper said. "He explained that he wasn't getting out of agriculture, he was just trying to save his ranch."
Gary Smith, a Sequim, Wash., dairy farmer and the chairman of Northwest Farm Credit Services in Spokane, said he has been forced to seek extra income by hauling milk for his processing cooperative and developing property his family owns in Spokane. He also said he expects his nonfarm income to soon surpass that of his dairy farm.
"Does this diversification make me a part-time farmer? Does it minimize my needs … to have my credit needs met by a single lender? Clearly the answer to those questions is no," he said.
Bankers object to any efforts to widen the lenders' authority. Some not only want to maintain the current restrictions on lending to part-time farmers, but are calling for an outright ban on nonfarm lending by the lenders.
According to many bankers, Farm Credit lenders are making more and more loans for nonfarm projects, and many of the borrowers are little more than nonfarm developers and businesspeople who happen to own a few acres of farmland. As proof, the bankers cite a March 2002 report by the General Accounting Office, which criticized Farm Credit lenders for failing to lend enough money to small and beginning farmers.
Like their Farm Credit counterparts, the bankers who spoke at the hearing provided some examples to illustrate their side of the story.
Gayle Kaalberg, the president and CEO of the $82 million-asset Farmers and Merchants Savings Bank in Lone Tree, Iowa, said a bank in Boone County lost a farm real estate loan to the Farm Credit System, even though the borrowers rent out their agricultural land. According to Mr. Kaalberg, they used the loan to refinance their residence, which is not a farm property.
Dwight Hossle, a regional president of the $693 million-asset Dacotah Bank in Faulkton, S.D., said a Farm Credit lender in his state made a loan to a group of lawyers who used it to renovate some fast-food restaurants they owned.
Bert Ely, a banking consultant from Alexandria, Va., said future situations like the one Mr. Hossle described could be avoided by capping Farm Credit loans at five times the borrower's farm income. Thus, a part-time farmer who earned only $5,000 a year would only be able to borrow $25,000 from the system, while a producer with an annual farm income of $40,000 could borrow $200,000.
The Farm Credit Administration says it will probably be months before it finishes drafting the changes to its regulations.
