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The shaky farm credit system: foreclosing its own.

Perry Wilson of Cameron, Missouri, has been farming for more than fifty-two years, but neither he nor his sons, Perry Jr. and Randy, put in a crop this spring on their 820-acre spread in the northwest part of the state. A year and a half ago, after five decades of paying their bills on time, they missed a mortgage payment. Perry Jr. says their financial problems started because of "controlled low prices and high interest rates." Then the Federal Land Bank of St. Louis foreclosed their mortgage and scheduled a sheriff's sale for March 15 on the steps of the Clinton County courthouse, in Plattsburg.

The Wilsons have been active in the farm movement for a long time, and they claim that the Federal Land Bank never fully informed them of their rights. So it was no surprise that when the day of the sale arrived, they had some supporters on hand. Urged on by various farm groups, more than 1,000 farmers and trade unionists assembled in front of the courthouse for a rally and shouted "No sale!" for nearly a half-hour. Several of the demonstrators were arrested and a number suffered bruises after a shoving match broke out between them and police and sheriff's deputies. The Federal Land Bank trustee who was "conducting" the sale announced that the only bidder was the Federal Land Bank--$312,000 for the 700 acres up for sale. Anyone more than ten feet away could not hear him above the din. He quickly retreated inside the courthouse, which was locked for the rest of the day.

While the rally was in progress, Clinton County Sheriff Robert DeFreece told me that he had expected trouble and had called everyone from Federal Land Bank officials to Missouri Senator John Danforth in hope of persuading someone to call off the sale. When his efforts failed, he brought in twenty-five law officers to insure that the bidding took place at the appointed time. "This isn't the way for the farmers to make their point," he insisted. "Besides, most of these people aren't from the area."

Although that was not the first protest the Federal Land Bank had faced over a foreclosure, the Plattsburg rally may have been the largest and most determined one. It exemplified farmers' rising animosity toward the Farm Credit System (F.C.S.), a member-owned cooperative established by the government in 1916 and expanded over the years. The land bank is one of three institutions in the system, the others being the Federal Intermediate Credit Bank (F.I.C.B.) and the Bank for Cooperatives. The system covers twelve districts, each with a land, credit and cooperative bank. The land bank lends money for real estate purchases through local Land Bank Associations; the credit bank provides money for farm expenses like livestock, equipment and supplies through local Production Credit Associations; the Bank for Cooperatives funds producer-owned grain elevators, dairies and other such ventures. The land bank provides about 40 percent of all farm real estate loans and 20 percent of non-real estate loans. Its total loan portfolio exceeds $78 billion, larger than that of the Continental Illinois National Bank and Trust Company, which the Federal Reserve bailed out last year.

The Farm Credit System is capitalized in two ways: the banks sell bonds on Wall Street at comparatively low interest rates, which enables them, theoretically, to loan money to farmers at reduced rates; and the borrowers purchase stock in their associations by leaving as much as 10 percent of their loans on deposit in return for shares.

Because the F.C.S. was set up specifically to serve farmers and because it is ostensibly owned and controlled by them, foreclosure sales like the one in Plattsburg leave members with a deep sense of betrayal. Amid the most depressed farm economy since the 1930s, "us" has suddenly become "them," and farmers are venting their anger on an institution they had been told to regard as a friend. That anger is a departure from the farmers' traditional tendency to blame themselves for their economic misfortunes. Seeing their neighbors face the same problems, many of them no longer meekly acquiesce when loan officers tell them they are bad managers who should get out of farming. Instead, they blame the system--which includes the Farm Credit System. As they exchange stories about their dealings with lenders, they have pieced together a troubling picture of an institution that may be concealing its financial troubles and, moreover, taking them out on its members.

In the words of former loan officer Melvin Schneider, the system is "chasing its own tail." Schneider maintains that F.C.S. loan officers consistently overvalued farms as collateral when they made loans during the inflationary 1970s. When land values fell, they panicked. Now they are undervaluing farmers' productive capacity. As a result, they are stepping up foreclosures to retire bad loans in order to cut their losses. When those farms go on the market, land values drop even more, putting other farmers in jeopardy.

Schneider is one of a growing number of former Farm Credit System employees who are helping farmers develop proposals for reforming the F.C.S. Another is Minneapolis attorney James Corum, who was general counsel and corporate secretary for the St. Paul Federal Intermediate Credit Bank until he was fired over a policy disagreement last September. Corum holds seminars throughout the nation for farmers, attorneys and financial planners on the rights of stockholder-borrowers of the Farm Credit System, and serves as a consultant to farmers and their attorneys on specific legal problems.

Heightened awareness of their rights, combined with greater militancy, has produced scenes like the Plattsburg rally and also like the February 2 meeting in Council Bluffs, Iowa, between F.C.S. officials and a delegation of twelve farmers, all stockholders in local credit associations in the Omaha district, which covers Iowa, Nebraska, South Dakota and Wyoming. The farmers presented ten demands and requested answers to ten "supplemental questions."

According to Pleasantville, Iowa, farmer Jim White, a delegation member who is fighting his credit association's attempt to foreclose on his farm, the group demanded that the officials hire an independent accounting firm to audit the Omaha F.I.C.B.'s books; make financial statements of individual associations available to members, as well as bylaws, membership lists and copies of their loan files; give members thirty days' notice before applying their stock to payment of overdue loans; and print and distribute a members' bill of rights, informing them, for example, of their right of appeal.

To Corum, the fact that members of a cooperative had to make such demands illustrates the absurdity and illegality of much of the present policy. At his seminars, he likes to repeat the statement a loan officer once made. "When times were good there was no need to tell farmers their rights, but now that times are rough, I guess we have to."

Ron Hanser, vice president for public affairs for the Omaha Farm Credit Bank, denies that information is withheld. "Most of what they were asking was readily available to them," he said. "I'm surprised by their concerns and questions."

According to Peterson, Iowa, farmer Robert Donahoo, when a group of farmers from his region who wanted to protest the firing of a sympathetic loan officer requested a copy of their credit association's bylaws in the fall of 1983, they got a runaround for several weeks. Only after Representative Berkley Bedell's office in Sioux City intervened could they obtain a copy. Nevertheless, Hanser maintains that the F.C.S. is forbidden to divulge membership lists because to do so would violate members' privacy.

Other examples of the system's inconsistency and arbitrariness are contained in a response by the Farm Credit Administration (F.C.A.), which regulates F.C.S. activities, to criticisms raised by George Bowling, a Circleville, Ohio, farmer. On April 20, 1984, in reference to one of Bowling's charges, the F.C.A. told Congress, "Stockholders generally have a right to such lists under corporate law." But Bowling points out that his credit association had turned down just such a request, and calls the statement one of many exercises in semantics designed to mislead Congress.

Several U.S. representatives have come to the same conclusion and are pressing for more information about Farm Credit System operations. Iowa Representative Cooper Evans has called for an audit by the General Accounting Office because he is suspicious of the F.C.A.'s "in-house" audits. "They're all on the same team," said Evans's press secretary, Terry Mikelson, referring to the relationship between the Farm Credit Administration and the Farm Credit System.

There is also "circumstantial evidence" of the system's financial problems, Mikelson says, which F.C.S. officials have not admitted. "Why are their interest rates rising to 17 to 18 percent when their bonds are selling on Wall Street at T-bill rates?" he asks. "Why has it been necessary to close down about a dozen credit associations in recent months due to insolvency?" Mikelson adds that Evans has pieced together much of his information about the system's lending practices from case histories in his largely rural district. He suggests that the system's get-tough policy with borrowers stems from its own financial difficulties.

Mikelson related the case of a farmer now living in Iowa City who until a year ago was actively working his mother's land. "They were long-term borrowers but had been in arrears this last year. They were able to sell one of their farms to improve their cash flow statement, and were able to obtain a one-year grace period."

When that period was up, the Farm Credit System decided to foreclose and sell the land at a sheriff's auction. It was scheduled for 2 P.M. on a Friday. On Thursday night, the loan officer called the farmer and said he could still redeem the farm by bringing in $75,000 cash by 2 o'clock the next afternoon.

"He had three lines of credit but had to drive around to line them up and got a speeding ticket doing it," Mikelson said. "When he realized he would not make the deadline, he called his wife, who had their attorney relay a request to wait until he arrived." The lender refused, and the sale was over when the farmer finally got there, at 2:15. The only bidder was the creditor, and Representative Evans has been working with F.C.S. officials in the Omaha district to persuade them to reverse that action.

Recently farm credit officials have begun to admit that the system is in trouble. Testifying before the House Agriculture Subcommittee on Conservation, Credit and Rural Development, F.C.A. governor Donald Wilkinson endorsed a resolution calling for Federal measures to relieve lenders of the burden of carrying nonperforming agricultural loans (those on which they have given up hope of collecting further payments). The Farm Credit Council, an autonomous trade association of F.C.S. lenders, has since proposed setting up an Agricultural Conservation Corporation, which would buy up land from distressed farmers. Those properties would be removed from the market for up to five years, reducing the current glut of land on the market and checking the precipitous decline in values which has accelerated the wave of foreclosures.

In a more recent appearance before the subcommittee, Wilkinson stressed the need for Federal insurance to protect borrowers' equity in associations that go out of business, just as the Federal Deposit Insurance Corporation protects people's savings. He also asked for power to deal with problems at local associations before they get out of hand. Under the present system, he testified, "unsafe and imprudent practices, even if identified by F.C.A., cannot be remedied . . . until the practices result in insolvency."

Since September 1983, eleven local credit associations have collapsed. Thirty-nine others had to be merged with stronger associations because of financial difficulties. From 1981 to 1984, eleven of the twelve districts lost members; in several of them, the decline was more than 20 percent. In the Omaha district the F.I.C.B.'s loan volume dropped from $2.2 billion at the beginning of 1984 to $1.8 billion at the end of the year. Although Hanser says much of the loss is attributable to "paydowns" on loans by farmers who simply are not borrowing more, associations in the district also showed a membership decline of more than 10 percent that year. Some of those farmers have been forced out of business, and some, who are more secure borrowers, have drifted to lending institutions that offer lower interest rates.

Most observers consider it unlikely that Congress will allow the Farm Credit System to collapse. Investor confidence on Wall Street, where F.C.S. bonds are a popular investment vehicle, remains strong, buoyed by the expectation that Congress will step in if the system is in trouble. The cost, however, might be high, and President Reagan has already vetoed one farm credit measure this year.

The Farm Credit System has been a largely unnoticed financial giant for years, but it is increasingly unable to avoid the spotlight as the farm crisis intensifies. Right now, the farmers are suffering the most, and Perry Wilson Jr. spoke for many of them in Plattsburg this March:

The people in this country have made the biggest mistake. They let George up there take care of their business. Let George do it, and we'll lose her right out from under our noses. Believe me, George ain't taking care of it up there right now. We're about to pay for it through the nose again.
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Author:Schwab, Jim
Publication:The Nation
Date:May 11, 1985
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