Although a recent study by the Office of the Comptroller of the Currency concluded that Midwest farm banks have improved their underwriting policies, the comptroller is urging agricultural lenders to beef them up further.

"We found that banks continue to reasonably underwrite and administer agricultural loans," Comptroller of the Currency Eugene A. Ludwig said in a recent statement. "We are thus assured that banks are better prepared to deal with adverse economic conditions than they were in the 1980s."

But in its report last week, which covered nearly every aspect of farm lending, the OCC still raised concerns in several areas.

"We encourage bankers to compare their underwriting systems to our findings and implement changes as appropriate," Mr. Ludwig said. "Recent volatile commodity prices, adverse weather conditions, and uncertainty regarding government support programs reinforce the need for sound policies and administration over agricultural lending."

The 1995 study, which was sent to national banks in the Midwest, updates similar examinations of farm banks in 1990 and 1992. The OCC's 1990 study of agricultural loan underwriting was more alarmist, saying that many of the banks lacked proper underwriting standards to assess and control farm loan risks - weaknesses similar to the late 1970s and early 1980s that contributed to agriculture loan losses.

The most recent report commends the overall underwriting standards of the banks studied in Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota.

It assessed 50 national banks' practices in making and supervising farm loans, a sample with characteristics that mirror those of the 284 national banks in the Midwest district with at least 25% agriculture loans, the agency said.

The study concluded that farm banks have improved their analysis of borrower repayment capacity and have increased their use of financial software to evaluate credits.

And though banks have a history of relaxing underwriting standards during good economic times, there was little evidence of this in the study, the agency said.

That said, the study noted several areas that could be improved. For instance, it expressed concern over information that some banks' loan committees are not reviewing farm loan approvals.

Many "of the difficulties experienced by banks in the 1980s were the result of inadequate systems to ensure compliance with internal policies and banking laws," said the study, which found that 38% of the banks did not review applications for compliance with their own policies and 47% did not review them for compliance with banking laws.

And not enough banks were reviewing information about collateral and secondary repayment sources, which could expose the institutions to greater risk if the primary repayment sources failed, the agency said.

The report also noted continued increases in agricultural loan officers' work loads - and that 44% of banks don't review them.

At "what point does a loan officer's work load result in a reduction in his or her ability to monitor loan quality?" the study asked.

Moreover, 84% of the banks lacked written performance standards for their loan officers and of those that had them, 25% don't address compliance with policy and banking laws.

The study found that many banks had tightened their controls.

Many required farmers to partially fund livestock and stored crops with equity or required larger down payments on loans secured by real estate.

However, some had loosened their standards. The study found fewer banks requiring customers to submit marketing plans for crop sales before advancing operating funds, while more banks are requiring lower down payments on machinery than in the past.

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