Letters to Regulators
Proposed Regulatory Streamlining of the Farm Service Agency's Direct Farm Loan Programs
April 8, 2004
Deputy Administrator for Farm Loan Programs
RE: Proposed Regulatory Streamlining of the Farm Service Agency's Direct Farm Loan Programs; 7 CFR Parts 761 - 769; [RIN 0560-AF60]
Dear Deputy Administrator:
We are sending this letter in response to USDA's Farm Service Agency's proposed rule referenced above and we particularly focus on the proposed redefinition of the term "family farm". ICBA1 is the nation's largest banking trade association and we exclusively represent the interests of our nation's community banks. There are thousands of community banks located in rural areas and many of them view the guaranteed loan program as very important.
Background: FSA Proposed Rule
The FSA has asked for responses to a February 9, 2004 proposed rule that would update and streamline its regulations for administering the Direct and Guaranteed Loan Programs. The agency is to be commended for its efforts to consolidate and simplify the regulations governing the direct lending program.
However, the FSA's proposal to define a "family farm" for loan eligibility purposes as any farm with annual gross farm income not exceeding the greater of $750,000 or the 95 percentile of farms in a given state with sales exceeding $10,000 would arbitrarily define "family farms" and limit participation in farm loan programs by legitimate family farmers. While this definition is aimed at making the application of who is eligible for FSA loans less subjective between states and counties within a state, its implications for eliminating "family farms" from program eligibility could potentially be wide reaching. It is our understanding that the proposal would make ineligible approximately 25,000 farms, including 5,500 full-time "family farms". Therefore, the proposal would immediately make ineligible a significant number of family farms based on gross income.
Because the gross income level is not indexed to inflation, the number of ineligible family farms could grow considerably over time and the real size of family farms eligible for FSA financing would become smaller and smaller. We experience a similar phenomenon on a regular basis in regards to deposit insurance offered consumers by commercial banks. The deposit coverage level, set at $100,000 in 1980, was not indexed to inflation and now has eroded by approximately one-half its original value. In the future, for example, could a farm be become ineligible if family's gross income exceeded the $750,000 threshold because the farmer's wife has an off-farm job?
We also understand that the greatest impact would likely be on dairy, fruit and vegetable, nursery, and some cotton, rice, and peanut farms - namely farms that produce higher value commodities. For example, a 230 cow dairy operator, with a typical per cow production of 20,000 pounds of milk per year, would be ineligible for FSA guaranteed loans under the proposal. Often in a dairy operation, several members of the same family have joined together for the sake of economic efficiencies. Many of these family owned dairy farms could become ineligible based on gross income even though their net incomes were very marginal.
We also note that estimates show the all-milk price for 2004 is projected to exceed $16 per cwt, a much higher price than farmers experienced just a few years ago. This suggests that some of the same dairy farmers who may have been eligible for FSA loans in previous years could suddenly become ineligible within the next year or so. This would be true even though their expenses, driven by higher fuel and feed costs for example, will also have risen dramatically. Thus, we believe that simply using a gross income figure or basing eligibility on the 95th percentile, can be just as arbitrary as FSA feels the current criteria is. In several states with dairies, even using the 95th percentile, up to two-thirds of dairy operations would become ineligible under this proposal. Therefore, the arbitrariness FSA seeks to eliminate would just be redefined and would still exist.
In today's environment of global competition and producing commodities and value-added products for the export market, a proposal that penalizes high-value, low net income operations the most contradicts the market driven trends occurring in the farm sector. Farms continue to become fewer in number but larger in size as they seek to survive in a world market.
Commercial Lenders Depend on FSA Guarantees
Commercial banks are consistently the largest users of FSA's guaranteed loan programs and continue to use the program to provide financing to borrowers who might not otherwise be able to obtain a loan without the guarantee. We point out that the current loan size limitations ($782,000 for guaranteed and $200,000 for direct loans) already create some restrictions on who applies to FSA for financing.
With today's prices for land and equipment and the rising costs of production, loans of this size do not typically finance large farm operations. For example, one banker commented to us on this issue stating, "In many cases in Texas, for a family farm to be economical, the size of the operation is large enough that these limits do not allow the FSA to be an adequate source of financing, especially if the operator has both real estate debt and equipment debt".
The proposed rule also seeks to clarify the meaning of "family members" when determining if substantial labor is provided by the loan applicant or persons related by blood or marriage. The proposal defines "family members" as a spouse, parent, child, brother, or sister. Limiting eligibility to just operations with the relatives named above would certainly cause some "family farms" to be excluded because they may have uncles, grandchildren, or grandparents as partners. This provision should be revised to reflect the various relatives that could be involved in the farm operation.
ICBA was a signatory of the letter sent to FSA by the American Farm Bureau Federation and other organizations calling on FSA to withdraw the proposed definition of a "family farm." In a survey to ICBA's Agriculture-Rural America Committee, one option presented was whether FSA should allow lenders to determine an eligible family farmer based on current FSA criteria. For example, bankers categorized as PLP or CLP lenders have a degree of flexibility in terms of utilizing FSA loan guarantees. This option would have the advantage of not requiring the staffing time currently required of FSA to determine who is an eligible family farmer. However, some bankers suggested that this option could also be abused by certain lenders who may not follow the FSA criteria. Even if this scenario were addressed through some type of FSA audit procedure, several bankers stated their strong desire for FSA to continue determining eligibility in case there is a problem with a delinquency at a later time and other issues.
Therefore, we would suggest FSA withdraw the proposed redefinition of a family farm and keep the current criteria intact. Perhaps FSA could streamline its review process for determining eligibility or simply conduct random audits at county offices, which would reduce the amount of time FSA currently spends on the issue. Such a course would seem to be less problematic than the proposed rule and other options that might be considered.
Another issue in the proposed rule that is addressed by FSA is the eligibility criteria for entities. The rule establishes strict criteria including: all members of an entity must be involved in the operation; other operations that members may be involved in must not be larger than a "family farm"; and the collective interests of the members cannot be larger than a family farm unless each member's ownership interest is not larger than a family farm and all members are related by blood or marriage. If an entity is a trust, the trust must qualify as a joint operation to be eligible.
A corporation, partnership, or joint operation with 50 percent or more of the ownership held exclusively or in combination by another trust, estate, corporation, partnership, or joint operation would not be eligible for FSA loan programs.
We do appreciate and agree with FSA's intent to ensure that non-farm speculators are precluded from obtaining FSA loans because these funds are limited by annual appropriations as set by Congress. However, these provisions may be overly burdensome or complex and may lead to some unintended disqualifications of family farms. We advise FSA, in regards to provisions affecting entities, to review possible situations where legitimate family farmers could be excluded under the proposed criteria.
There may be a number of reasons farm families create different legal entities, e.g., estates, trusts, that aid in the transfer of farms from one generation to the next. Use of these financial planning tools should not preclude legitimate family farm operations. Therefore, we believe it may be worthwhile to prohibit obvious entity abuses, such as outside speculation by non-farmers, but to also ensure entity provisions do not make genuine family farm operations ineligible.
We commend FSA's effort to streamline FSA loan regulations as contained in much of the proposed regulation. However, FSA's attempt to clarify the definition of a family farm and reduce the discrepancies in how it is applied would present many problems. Furthermore, the proposed definition would unnecessarily exclude legitimate family farmers from access to capital at the very outset and this problem would grow over time to preclude even more family farmers. FSA loans already have dollar limits and these restrictions serve to limit the size of the operation receiving financing.
Defining a "family" farm is difficult because family farms, just as all farms, vary by region and commodity produced. Obviously family farms should be actively engaged in agricultural production and earn farm income and receive loans for agricultural purposes and meet other criteria imposed by FSA. But it is likely not possible for FSA to administer a one-size-fits-all definition in a completely objective manner nationally. Simply using a number representing gross farm income or a percentage ranking by state does not solve the problem; rather the methodology creates new problems that don't currently exist.
We appreciate the opportunity to comment on this proposed rule. Again, we urge FSA to withdraw the proposed redefinition of a family farm. If you have any questions regarding this comment letter, please feel free to contact Mark Scanlan, director of ICBA's Office of Agriculture and Rural Policy or Reece Langley, deputy director of ICBA's Office of Agriculture and Rural Policy at 202-659-8111.
Camden R. Fine
1 ICBA represents the largest constituency of community banks in the nation and is dedicated exclusively to protecting the interests of the community banking industry. We aggregate the power of our members to provide a voice for community banking interests in Washington, resources to enhance community bank education and marketability, and profitability options to help community banks compete in an ever-changing marketplace.