ICBA - News - Summary of ICBA Recommendations

Summary of ICBA Recommendations

ICBA Recommendations - Farm Bill
Farm Credit & Rural Development Titles


A number of very positive changes are included in the House and Senate farm bills that will improve the operation of USDA's farm loan programs. ICBA recommendations support a number of provisions from each bill while also suggesting changes to further enhance these programs. Our recommendations include:

Authorization of Funding for FSA Loans: ICBA has long sought adequate funding for FSA loan programs. This is especially important because these programs have exhausted appropriated funds, leaving farmers in the lurch waiting for supplemental funding from Washington, D.C. so they can continue their farming operations. In fact, Congress has acted twice to pass supplemental appropriations bills which included funds for FSA loan guarantees. *ICBA prefers Section 512 of the House bill which authorizes funding for the FSA guaranteed and direct loan program at "such sums as may be necessary" over Section 529 of the Senate bill which authorizes specific funding limits for each fiscal year and provides no discretion to the Secretary. *If appropriated levels are limited, then a permanent mechanism to quickly provide emergency funds should be incorporated to ensure adequate monies are available to farmers if appropriated funds become depleted.

Easing the Limit on Eligibility: *ICBA prefers Section 502 of the House bill that suspends the limitation period for which borrowers are eligible for guaranteed assistance until December 31, 2006 over Section 512 of the Senate bill which suspends the eligibility limitation only on a case-by-case basis under strict circumstances not subject to administrative appeal. *Alternatively, the conferees should consider suspending the current 15-year limit on eligibility through the life of the farm bill. The counting of years in which producers have guaranteed loans in determining an arbitrary eligibility limit is inconsistent with allowing lenders and their farm customers the freedom to arrange the best financing options related to the needs of the farming enterprise. These arbitrary eligibility limits are also inconsistent with the fact that private sector lenders provide the loan funds, not the government.

Local Flexibility If Centralized Administration of FSA Lender Programs: ICBA is concerned with Section 503 of the House bill that allows the Secretary of Agriculture to administer FSA guaranteed loan programs through centralized offices established in States or multi-State areas. The Senate bill has no similar provision. This issue has been controversial in the past among lenders due to varying degrees of administrative efficiency among FSA offices. While this may help some lenders who work with multiple county offices, it may also hinder lenders if the centralized office is unresponsive to the legitimate needs of farmers and their lenders. Many community banks prefer to deal with their local FSA offices with whom they have a long-standing, working relationship. *ICBA recommends that language direct USDA, in any move towards centralized offices, to also provide lenders with the choice of continuing to work with local FSA offices. Lenders will ultimately choose to deal with the FSA office that handles their business in the most efficient manner, but this should be driven from the grassroots level so that centralized offices do not lock in bad management.

FSA Low-Doc Loan Program: ICBA appreciates both the House and Senate provisions that raise the limit on FSA low documentation (low-doc) guaranteed loans above the current $50,000 level. *ICBA prefers Section 504 of the House bill that increases the size of low-doc loans to $150,000 over Section 526 of the Senate bill that increases the size of these loans to $100,000. The SBA's low-doc program has a similar $150,000 loan size. "Low-Doc" allows for reduced paperwork for lenders and farmers in obtaining loan guarantees, makes it easier for borrowers to use farm loan programs, and reduces approval time.

Reauthorizing the Interest Rate Reduction Program: *ICBA prefers Section 514 of the House bill that reauthorizes the interest rate reduction program through 2011 over Section 530 of the Senate bill that makes the interest rate reduction program permanent. Current authority for this program is set to expire in 2002. There have been complaints raised about the program from lenders who suggest the program is at times abused by lenders using the program as a marketing tool to lure farm customers away from competitors while encouraging farmers to expand their farm size to an extent that adds much greater risk to producers' farming operations. Permanently reauthorizing the program would remove a level of accountability that would otherwise exist if the program has to be reauthorized periodically.

Aggie Bond Program: *ICBA supports Section 506 of the Senate bill which allows the Secretary to guarantee a loan made under a State beginning farmer or rancher program, including a loan financed by the net proceeds of a qualified small issue agricultural bond (Aggie Bond). The House bill contains no similar provision. Authorizing FSA guarantees to be used for state aggie bond beginning farmer loans would provide opportunities for lenders to increase financing, at lower rates, to beginning farmers.

Down Payment Loan Program: *ICBA prefers Section 507 of the Senate bill that provides as part of the down payment program that USDA finance 40 percent of the loan (current law is 30 percent) and provide a repayment term of 20 years (current law is 10 years) over Section 515 of the House bill that increases the repayment period to only 15 years and does not increase the amount of the loan that USDA finances.

Bridge Loans: *ICBA supports Section 502 of the Senate bill that authorizes the Secretary to use FSA loan program funds to refinance short-term, temporary "bridge loans" made by commercial lenders to a beginning farmer or rancher who has been approved for a USDA farm ownership loan but is awaiting funds. The House has no similar provision.

Farmer Mac Board of Directors: Section 544 of the Senate bill significantly expands the board of directors of the Federal Agricultural Mortgage Corporation (Farmer Mac). The House bill has no similar provision. Many community bankers are Class A shareholders of Farmer Mac and have a direct, vested interest in the make-up of the board. The current structure of Farmer Mac's board was designed by Congress to provide a balance between various types of stakeholders, including bankers, the Farm Credit System, and insurance companies. *ICBA recommends against adopting such a significant expansion of the Farmer Mac board.


Business and Industry (B&I) Loan Guarantee Program Modifications

Both the House and Senate farm bills make a number of changes to the B&I loan program. While a number of these changes are very positive, others add new risks to the program's operations and threaten to shift funding away from rural areas. ICBA recommendations include:

Low-Doc Loan Program -- *ICBA supports Section 638 of the Senate bill that increases the current B&I low-doc loan guarantee program from $50,000 up to $400,000 during fiscal years 2002 and 2003 and up to $600,000 thereafter if the Secretary determines there is not a significant increased risk of default on the loan. The House bill has no similar provision. The current size limit on B&I low doc loans is unreasonable and expanding the low-doc size limit will make the program more workable for smaller borrowers and community banks and should provide increased economic benefits to rural areas.

Fees for B&I Loan Program - The Senate bill allows the Secretary to assess a one-time fee on guaranteed loans of up to two percent (section 635, subtitle C). ICBA believes a standard two-percent fee that is automatically applied to all borrowers could be excessive and make such loans less affordable and less attractive for banks and borrowers alike, thus discouraging use of the program. *ICBA recommends that fees be limited to one-percent on loans of less than $500,000 and that lenders be allowed to amortize the cost of fees over the life of the loan. This would minimize the up-front cost burden on borrowers, many of whom may just be starting a business and have not had an opportunity to generate significant revenues.

Preventing Rural Dollars From Going to Non-Rural Areas - *ICBA recommends using B&I loan guarantee funds only in rural areas. Thus ICBA prefers Section 635 of the Senate bill that limits any B&I guaranteed loan funds received by a farmer-owned cooperative headquartered in a metropolitan (non-rural) area to only being used for projects located in rural areas, over Section 523 of the House bill that authorizes B&I loans to be used outside of rural communities. *Since money is fungible, ICBA also recommends the Secretary be directed to more closely monitor these funds to ensure their proper use.

The main purpose of the B&I loan program is to help create jobs and stimulate rural economies by providing financial backing for rural businesses. In an era of limited funding for rural development, we need to do all we can to target rural program dollars to rural areas. High population areas do not face the same obstacles that rural communities face in terms of creating jobs to remain viable. Benefits of targeting rural development funds to truly rural areas include not only enhancement of farmers' income, but also job creation, the preservation of the local tax base and local infrastructure, diversification of the rural economy and the creation of off-farm jobs that help farm families survive.

B&I Loan Limit Size - *ICBA opposes Section 612 of the House bill which increases the B&I loan limit from the current $25 million level to $100 million and urges that it be stricken. This large increase represents an unnecessary risk to the B&I loan program. In addition, only a handful of approved $100 million loans could eat up the limited funding available for this vital program. Just this past year almost $1 billion in guaranteed loans, for nearly 400 projects, could not be approved due to lack of funding. Large loans of this magnitude would exacerbate such problems in future years.

Disallow Counting of Intangible Assets - *ICBA recommends deleting Section 619 of the House bill which requires intangible assets and subordinated unsecured debt to be considered as collateral in determining eligibility for B&I loan guarantees. Use of these resources would be subjective and introduce yet another element of higher risk to the program since collateral may not be easily convertible for purposes of collecting on a defaulted loan.

Rural Development and Rural Equity Funding

Both the House and Senate bills contain provisions to enhance rural development programs. The Senate bill also contains several programs designed to stimulate greater equity investment in rural areas. ICBA has recommendations in particular on the following provisions.

Rural Equity Fund: *ICBA supports Section 601 of the Senate bill that authorizes the creation of a National Rural Cooperative and Business Equity Fund. The House bill has no similar provision. ICBA worked with a coalition representing bankers, FCS institutions and other rural cooperative organizations to develop language for this program. Establishing a rural equity fund would help attract needed private sector equity capital investments in rural business start-ups and expansions. This provision would encourage a public-private partnership to promote value-added agriculture and producer-owned cooperative and business projects that existing venture capital funds lacking a rural focus cannot accommodate. In addition, this program is designed to compliment, not compete with, efforts of private sector lenders.

Rural Business Investment Companies (RBICs): Section 602 of the Senate bill authorizes the creation of a Rural Business Investment Program. The House bill has no similar provision. We recommend several changes to this program in order to achieve the program's intended objectives.

Ability to Leverage Capital - The Senate bill authorizes creation of RBICs and allows those RBICs with $10 million of capital to leverage that capital by 300 percent. Although the language also authorizes creation of RBICs with $2.5 million in capital, these smaller RBICs have no ability to leverage their capital, making it doubtful that smaller RBICs would be launched. It would take many more smaller financial institutions to form a larger RBIC, thus minimizing the RBIC's localized focus and reducing the incentive to invest in the RBIC by local lenders. This will result in establishment of many fewer RBICs, with those created likely formed by larger financial institutions rather than the thousands of financial institutions located throughout rural America. *ICBA recommends that smaller RBICs be allowed to leverage their capital if they can show they are financially viable, have appropriate risk management strategies, have had a positive impact on the financial health of their rural area, and have a reasonable prospect for continued success. Smaller RBICs would then be able to grow their size as they successfully invest in local, rural projects in their rural areas.

Operational Assistance Grants - The Senate bill provides operational assistance grants (section 602, subsec. 384H) of up to $1 million for RBICs and the small businesses receiving assistance from RBICs. This operational assistance is very broad in terms of what the money is used for and is not limited to just technical assistance. SBA's New Markets Venture Capital Program, established last year by Congress, also allows operational assistance grants but limits the purposes of such funding: "None of the assistance made available under this section may be used for any overhead or general or administrative expense of a New Markets Venture Capital company or a specialized small business investment company" {15 USCS section 689g(c)}. *ICBA recommends that language be adopted that ensures operational assistance grants focus primarily on technical assistance to ensure such grants won't be used to drive competitors out of business who have not received free government funds and thus will not have the lower operational costs.

Public Accountability - The Senate bill ((sec. 602, subsection 384K(b)) requires the Secretary to do an annual report that generally summarizes the program's performance and prevents compilation of the report in a manner that permits identification of any particular type of investment. There is also a prohibition against release of any information prohibited under section 1905 of title 18, United States Code. This prohibition is not contained in the SBIC statute, which the RBIC language is modeled after. *While ICBA agrees with prohibiting release of proprietary and trade-secret information, ICBA recommends the final language ensure access to information that is non-proprietary, and non-trade secret in nature when necessary to determine whether an individual RBIC has acted in a manner that is consistent with the purposes and criteria of the statute authorizing RBICs. This will better protect taxpayers and the general public.

Rural Telework Program: ICBS supports Section 643 of the Senate bill that establishes a national rural telework institute and program. The goal of this program is to develop innovative, market-driven telework projects and joint ventures with the private sector that employ workers in rural areas in jobs that promote economic self-sufficiency.

Chapter 12 Bankruptcy: Section 1071 of the Senate bill permanently authorizes Chapter 12 farm bankruptcy provisions but does not make any reforms in the program to prevent abuses. ICBA recommendations include the following items: *Limit the number of times Chapter 12 can be utilized to no more than once per farmer; allow lenders to share in any appreciation during foreclosures when the value of the collateral increases; establish a specific time frame for developing Chapter 12 plans so that financing and management issues can be resolved in a timely manner to prevent erosion of producers' equity and financial resources; and ensure that a market rate of interest is paid for the life of the loan. In addition, Chapter 12 should narrowly limit the definition of a family farmer and eligibility should not be expanded to large agri-businesses. Adopting some or all of these recommendations will go a long way toward reducing the costs of Chapter 12 bankruptcy for both farmers and their lenders and will help ensure that credit decisions aren't prejudiced against marginal producers due to the potential risk of an unwieldy Chapter 12 procedure occurring if a borrower cannot ultimately repay his debt.

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