Banking & Finance and Government and Small Business

Federal farm lending could shrivel under latest budget: Banking associations oppose proposed fee increases

March 13, 2006

Brent Kerns likes to compare the U.S. Department of Agriculture's lending program to that of the Small Business Administration's. In short, the USDA helps farmers the way the SBA assists small-business owners.

But if a proposal to cut the budget of the farm loan program is approved, it could become as expensive to use as the SBA's offering. Supporters fear a hike in user fees would hurt those who need the money the most.

"That cost goes straight to the farmer," said Kerns, the USDA's Indiana farm loan program chief. "We are not in favor of that."

Under the Farm Service Agency, the USDA guaranteed nearly $2 billion worth of unsubsidized loans last year to America's farmers. The federal government backs 90 percent of loan amounts to protect lenders from debtors who default. The program is meant to give banks an incentive to lend to riskier borrowers.

It provided $32 million in 2005 to cover bad loans and budgeted $41 million this year. Under the current proposal, however, that figure would plummet to only $2 million in 2007. To compensate, program fees paid by banks, which are passed on to borrowers, would more than double.

The loans are used mostly for land purchases and operating expenses related to machinery and livestock needs. Farmers normally receive loans before the spring planting season and pay them back following the fall harvest. The average loan amount is roughly $200,000. The line of credit is good for five years, and farmers can draw upon it annually.

Banks pay 1 percent of the loan amount, which the government uses to guarantee the transactions. So, for a $200,000 loan, a fee of about $2,000 is assessed and passed to the borrower. Under the proposal, however, that amount would more than double, increasing the cost of credit, said Mark Scanlan, the Independent Community Bankers of America's director of agriculture and rural policy.

"This program is considered the lender of last resort," Scanlan said. "You're taking borrowers in a more tenuous credit situation and asking them to pay higher fees to get the credit."

Compounding the concerns is that farmers would pay the higher fees every year they draw upon their lines of credit, Scanlan said. For guaranteed loans, they can borrow up to $852,000 annually.

The fee increase is expected to produce about $30 million in savings in 2007 and $300 million during the next decade, according to the FSA. Despite the pending fee increases, the agency still expects almost 12,000 farmers to receive loans under the guarantee program in 2007. In 2005, 10,330 farmers took advantage of the program, according to the FSA.

Teresa Lasseter, FSA administrator, said the proposed cuts, which the agency supports, are part of the Bush administration's effort to reduce the deficit. An increase would bring fees more in line with those of the SBA loan programs, Lasseter said.

The Washington, D.C.-based ICBA and American Bankers Association are among the critics that wrote a letter last month to members of the House and Senate Committees on Agriculture deriding the new fees.

The budget proposal is subject to a public comment period, which is undetermined at this time. The decision to raise fees ultimately will rest with the Office of Management and Budget. The banking associations are lobbying legislators to denounce the cuts.

Because the loans are delivered by the private sector, administrative costs to the federal government are negligible, they contend. Loan losses in the program are low, they further argue, keeping costs in check.

Indeed, Indiana farmers last year borrowed $63 million from banks, Kerns said. Yet less than 1 percent defaulted on their loans. That figure has been constant the past 20 years.

A few of the larger participants of the program in Indiana include Bath State Bank, First Farmers Bank & Trust in Converse and Fowler State Bank. Midwest Ag Finance in Rushville, which operates solely by making loans to farmers, also is a user. The higher fees could lead to shriveling credit resources for farmers who depend upon them most, said Jerry Nickel, president of the Rushville lender.

"When we talk about public-private partnerships, this has worked fairly well, and we're making it less attractive," he said. "It would be particularly hard on young, beginning farmers."

Kent Yeager, director of government relations for the Indiana Farm Bureau, concurred. He finds the proposed cuts especially troubling, given the declining ranks of young farmers.

"Yeah, they're at risk," Yeager said, "but they have a good opportunity to make it."
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