Vague rules and secretive lawsuits are leading some bankers to abandon government-guaranteed lending to farmers.
The program sounds great — to entice banks to finance borrowers who do not meet traditional underwriting criteria, the Farm Service Agency will guarantee up to 95% of the principal and interest on loans of up to $899,000.
But even though the guarantee is designed to reduce a bank's risk, some bankers say the agency's unclear rules on what interest rate may be charged is leading to esoteric suits.
First Capital Bank, the Guthrie, Okla., subsidiary of the $101 million-asset FCB Holdings Inc., announced late last month that it would pay $1.4 million to settle one such suit, which had alleged the bank charged too much on loans guaranteed by the FSA.
The bank did not admit to any wrongdoing. Jack Stuteville, its chairman and chief executive officer, called the case "baseless" and urged Congress to step in.
"It is of the utmost importance that Congress now moves to stop this nonsense," he said in a press release. "If it doesn't, more and more banks will decide to no longer offer government-guaranteed loans for fear that they will also become targets of money-hungry and self-serving attorneys that initiate similar lawsuits against other small, rural banks."
Mr. Stuteville would not discuss the case further, but his attorney, Doug Jackson, a partner with Gungoll, Jackson, Collins, Box & Devoll PC, said First Capital decided the suit would be too expensive to defend and too risky to lose.
It was filed as a qui tam suit, which are cases filed on behalf of the government by a private citizen. These suits were created as a way for whistle-blowers to uncover fraud against the government. A suit is filed and kept under seal while the government investigates and decides how to proceed. This setup is meant to protect the plaintiff's identity and to give the government a chance to determine whether there is a case.
"The problem is that under the qui tam statute, the exposure is three times the amount of loss claims and interest assist claims you've been paid," Mr. Jackson said. "With that hanging over your head, you just about have to settle, even though you have done nothing wrong."
The crux of these cases rests on FSA regulations that bar a bank from charging a higher rate for a guaranteed loan than it charges an average agricultural loan customer. The rules also say the rate may not exceed what a bank would charge a moderate-risk borrower.
Roger M. Beverage, the president and chief executive officer of the Oklahoma Bankers Association, said bankers are settling these cases rather than litigating on an unclear rule.
"If the rules are clarified so you knew what conformed and what didn't, then you could make a judgment on whether you want to take on that risk" of fighting in court, Mr. Beverage said.
As a result of the lack of clarity, there will be less credit for farmers as bankers refuse to make FSA-guaranteed loans, he said.
"If you're going down a road that has heretofore been minimally risky and the risk multiplied exponentially, not because of anything you did wrong, but because there are no clear rules on what are right or wrong, you are going to look for something else," Mr. Beverage said.
The FSA refused to make an official available for an interview, and Stevin Westcott, a spokesperson for the agency, would communicate only through e-mail. But he wrote that the agency was aware of bankers' concerns and was working with lenders to address them. The agency is weighing whether its regulations should be changed, he wrote.
The agency could not say how many banks make these guaranteed loans or how that number has changed over time. But according to its Web site, it has committed $1.5 billion — or roughly half its available funds — to guarantee 6,349 loans thus far this fiscal year. The FSA could not say how those figures stack up to last year.
From the end of fiscal 2000 to the end of the last fiscal year, the principal guaranteed by the FSA increased 11%, to $8.8 billion, while the number of loans outstanding dropped 13%, to 59,543.
It is unclear how many of these lawsuits are pending, but one of the most well-known ones was brought against Gold Banc Corp. Inc., of Leawood, Kan., in 2004. The $16 million settlement of that case derailed Gold's deal to sell itself to Silver Acquisition Corp., which backed out, citing a material adverse effects clause. (Gold sold itself last year to Marshall & Ilsley Corp. of Milwaukee.)
The plaintiff in that suit, Roger Ediger, is a former borrower who lost his farm and became a lawyer. His firm, Mitchell & DeClerck PLLC in Enid, Okla., now specializes in this type of case. It reached a $2.1 million settlement in May of last year with Farmers Bancorp. Inc. of Cherokee.
The firm said that Mr. Ediger was traveling and could be reached only by e-mail. He wrote in an e-mail that many borrowers have asked him to look at their cases, and that most often he has concluded that banks are complying with the regulations.
He disagreed with bankers who claim the FSA rules are hard to follow.
"It is not difficult for banks to comply with the law," Mr. Ediger wrote. "Banks have computer software that keeps track of their yield on any number of parameters and loan categories. Banks can track guaranteed loans and nonguaranteed loans using this software — on a daily basis — to determine their compliance."
In June 2005, Gold filed a suit against the FSA alleging that the interest rate regulation was unconstitutionally vague. The U.S. District Court for Kansas dismissed that suit in December 2005, saying the issue was beyond its jurisdiction. Gold refiled in the U.S. Court of Federal Claims but withdrew the suit.
