The Bush administration wants the Department of Agriculture to follow the Small Business Administration's lead in funding its guaranteed loan programs.
The USDA's proposed fiscal 2007 budget calls for a reduction in funding for guaranteed loans made through the Farm Service Agency and an offsetting increase in fees on such loans. The loan guarantees cover up to 95% of any loss of principal and interest a lender might experience on a farm loan.
A similar fee increase implemented in 2004 has not seemed to hurt the SBA's guaranteed lending program. It guaranteed a record $18.9 billion in the fiscal year that ended Sept. 30.
But Robert E. Finney, the chairman and chief executive officer of the $72 million-asset Muleshoe State Bank in Texas, said the hard-pressed farmers who seek Farm Service Agency loans can ill-afford the added costs.
"This is a budget maneuver promulgated by some bureaucrat in Washington who has no idea of what the program is really for," he said.
According to Mr. Finney, Farm Service Agency loans are not intended for prosperous, veteran agricultural producers. Rather, banks use guaranteed farm loans to help farmers who have run into difficulties because of droughts or other problems beyond their control. The loans also help beginning farmers get started.
Over all, the Farm Service Agency plans to guarantee about $3.4 billion of loans in fiscal 2007. It is seeking a budget of $113 million to support its lending authority, versus the $150 million it requested in fiscal 2006, and the added fees would fill the gap.
Though Congress must approve the USDA's budget, the department can implement the fee increase through the rulemaking process.
The maximum amount a farmer can seek under the guaranteed loan program is $852,000. John M. Blanchfield, the director of the American Bankers Association's Center for Agricultural and Rural Banking, estimated that the fees, currently 90 basis points of the amount borrowed, would rise to 150 basis points for guaranteed farm ownership loans and 200 basis points for guaranteed operating loans.
Mr. Blanchfield said one benefit of increasing fees is that the Farm Service Agency would need less money from Congress to pay its credit costs every year. That reduction would eliminate much of the uncertainty that occurs when lawmakers are late in approving the budget, he said.
The same reason was touted as the chief benefit of the SBA fee hike.
In the last fiscal year the SBA did away with nearly $100 million that was earmarked for loan losses; it made up for the lost money by doubling the fees that lenders and borrowers paid to obtain its guarantees. Critics predicted that increasing fees would make SBA loans too expensive for start-up entrepreneurs, but the agency's lending activity has shown no signs of slackening. It expects to guarantee about $28 billion in fiscal 2007.
Still, Jeff Wolfgram, a vice president at the $578 million-asset First Dakota National Bank in Yankton, S.D., said the USDA's fee hike could lead to banks using the Farm Service Agency program less. The hike would make guaranteed loans more expensive to offer to customers, because banks would need to charge more to cover the fees, and that could lead some banks to abandon the program, he said.
First Dakota made over $9 million of guaranteed loans last year, he said.
"We use these for farmers who have suffered losses from drought or changes in the market, things beyond their control," Mr. Wolfgram said.
Mr. Finney said the proposed increases would come at a particularly bad time, because farmers are facing pressure from higher energy costs, which make it more costly to buy fertilizer and to plant and harvest crops.
Mark K. Scanlan, the director of agricultural finance at the Independent Community Bankers of America, said energy costs are not the only pressure farmers are facing. In many parts of the country, farmers also are dealing with droughts. Any increase in loan fees would hurt borrowers' chances of getting loans when they need them the most.
"If you're already very tight on making the loan cash flow and you come on and add a percentage point to their costs, you make it less workable at the start," Mr. Scanlan said.
