Testimony of the
Honorable Marsha Pyle Martin
Chairman and Chief Executive Officer
Farm Credit Administration
Before the Senate Committee on Agriculture, Nutrition, and Forestry
September 4, 1997
Good morning, Mr. Chairman and members of the Committee. I am Marsha Martin,
Chairman and Chief Executive Officer of the Farm Credit Administration.
With me are my fellow Board members Doyle Cook and Ann Jorgensen. We thank
you for the opportunity to appear before the Committee to discuss the availability
of credit in rural America. And, as requested, we will also discuss the
Federal Agricultural Mortgage Corporation (Farmer Mac) and the proposal
for a pilot program that would expand its eligible business activities.
We appreciate the Committee's attention to the availability of credit in rural America, and we compliment you on your foresight regarding this important issue by holding this hearing today. We share your interest because our mission is to promote a safe and sound, and continuing Farm Credit System (System or FCS) and Farmer Mac, as part of a competitive rural credit market. The FCA Board fully supports the Committee's efforts to ensure that dependable credit is available to all creditworthy individuals, municipalities, and businesses in a changing rural environment.
We believe that multiple credit suppliers are essential so that agriculture, rural America, farmers, ranchers and their cooperatives will continue to have a dependable source of credit in good times and bad. We further believe that profound changes are underway in agriculture, in banking, and in financial markets that likely will require adjustments in the authorities of all types of financial institutions serving rural areas. One of our concerns is that these adjustments be made in a safe and prudent manner.
I take this opportunity to point out that the Farm Credit System has recovered fully from the crisis it experienced in the mid-1980s. It is now healthy and growing again. The Farm Credit System Insurance Fund which provides further assurance of the viability of the Farm Credit banks and associations is expected to reach its secure base amount soon.
Farmer Mac has been successful as well in restoring its capital levels. From June 30, 1996 to December 31, 1996, Farmer Mac increased its excess capital by approximately $30 million. In our most recent report to Congress on the status of Farmer Mac the FCA reported that Farmer Mac's capital was over $32 million as of June 30, 1997.
With our primary focus on safety and soundness, we are committed to ensuring that the Farm Credit System provides credit as efficiently and effectively as possible to those borrowers who are eligible and creditworthy for not only the immediate future but the longer run. As a part of this commitment, the FCA Board this year adopted final regulations on who is eligible to borrow from the System. The rule also required higher capital standards for FCS institutions. This regulation, which became effective last March, removed some regulatory restrictions not required by law. As a result, System institutions now have greater flexibility to respond to the credit needs of agriculture and farm-related businesses, especially important in an ever-changing agricultural environment. This regulation strengthens financial standards and helps ensure a continuing, competitive source of credit for agriculture and rural America.
I personally believe that the mission of the Farm Credit System to finance the needs of American agriculture is as vital and important today as it was when the System was first established. It is critical to this great nation that agricultural producers continue to have a choice as to where they obtain their credit to buy their farms and plant their crops. Such efforts will help facilitate a continuing, reliable and affordable source of credit for agriculture and help to ensure an affordable food supply for America.
Farmer Mac Proposal
Regarding the proposal to expand the authorities of Farmer Mac, the FCA Board believes it is a public policy decision of the Congress to determine whether this expansion of charter is an appropriate way to deal with emerging rural credit needs. I can assure you that as we continue to study this proposal, our major emphasis will be on the safety and soundness of Farmer Mac.
It is our understanding that there may be a proposal offered that would permit Farmer Mac to purchase loans eligible for guarantee by the U.S. Secretary of Agriculture under USDA's Business and Industrial (B&I) loan program. Although we are not aware of any estimates of the market potential for the proposed changes to Farmer Mac's charter, it seems clear that the proposed new authorities would increase substantially Farmer Mac's potential business volume.
First of all, it appears that the proposed new authority would permit securitization of short- and intermediate-term farm business loans and loans to both proprietary and cooperative farm businesses. This would expand Farmer Mac from the farm mortgage business to virtually all kinds of loans to farms and agribusinesses. Our initial estimates indicate that the annual financings for business loans that would be eligible could exceed $50 billion. This compares with $8 to $10 billion of agricultural real estate financings which we estimate are eligible under the current authorities. More importantly, the authority to purchase and/or guarantee business loans would represent a fundamental change to Farmer Mac's primary mission.
There are safety and soundness concerns that should be considered, especially in the area of capital adequacy. Over the past 10 years, net chargeoffs on guaranteed SBA loans have averaged 8 to 10 percent annually. During this same period, USDA's B&I loans have had annual net chargeoffs up to 13.4 percent, and delinquencies ranging from 7.3 to 16.2 percent. Both the business failure rate and the delinquency rate significantly exceed similar rates for agricultural real estate loans. This indicates that Farmer Mac, under the proposed authorities, would be operating in an environment with much more risk.
We believe any increased levels of risk would need to be accompanied by increased levels of capital. Therefore, if Farmer Mac's authorities are expanded, FCA would respectfully request the appropriate regulatory authority to assure that the expansion into these new areas would be accomplished in a safe and prudent manner. The FCA Board notes that many recent credit studies have identified areas with unmet credit needs in rural America. We believe that existing authorities and areas of service may need adjusting in response to dynamic changes underway in the rest of the economy. Such adjustments may well be needed for Farmer Mac, the Farm Credit System, and commercial banks to fill existing credit gaps and stay viable for their own customers in this dynamic and changing environment.
Congress will determine whether it is appropriate to expand the role of Farmer Mac beyond the agricultural real estate market for which it was created and into an industry which could entail more risk. Because of this potential risk, we ask the Committee to consider carefully all issues before reaching a decision on the future direction of Farmer Mac. If it is the desire of Congress to expand the authorities of Farmer Mac, I assure you that the Farm Credit Administration will appropriately regulate these new authorities and ensure Farmer Mac's safety and soundness.
We would be pleased to answer any questions.