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$5.1 BILLION LOANED WITHOUT CREDIT CHECK BID TO TIGHTEN POLICY WAS FOILED

The Farmers Home Administration in fiscal 1987 approved $5.1 billion in loans without doing credit checks on any of the borrowers.

When new leaders at the agency attempted to tighten credit policies that same year, Congress -- led by a Mississippi congressman nicknamed "the permanent secretary of agriculture" -- blocked those attempts and instead loosened the standards so that delinquent farmers could get more loans.

That same summer, a federal judge in North Dakota issued an injunction that, for the second time in the 1980s, essentially halted the Farmers Home Administration from foreclosing on its most debt-ridden borrowers.

Granted, farmland prices plummeted in the 1980s as foreign countries moved to grow more of their own food, and that has much to do with the agency's $13.8 billion loss in fiscal 1988.

But that loss -- which is greater than the total value of New York State's farms in 1987 -- can't be blamed on the farm crisis alone. Farm loan losses at the Farmers Home Administration are approaching $40 billion in total, and one exasperated auditor blames that on a failure of all three branches of government.

"This has certainly been turned into a program where, if you get a loan, you're not really expected to pay it back," said John W. Harman, director of food and agricultural issues for the General Accounting Office, a government watchdog.

Not long ago, the Farmers Home Administration didn't even check to see if prospective borrowers could pay back additional loans. The agency approved $5.1 billion in fiscal 1987 for 90,000 farm and housing loans without doing proper credit prescreening, an inspector general's audit found.

The agency did not obtain commercial credit reports on applicants or require private lenders to obtain credit reports on the loans the agency guaranteed. In addition, the agency didn't screen loan applications against its own list of delinquent borrowers.

As a result, auditors found that of the borrowers they studied, the agency in fiscal 1987 approved $16.2 million in loans to borrowers who had already defaulted on $11.3 million in Farmers Home Administration loans.

"A guy would default on his loans in one state and then move to another state and apply for more loans to buy another farm, and we would lend him the money without knowing what happened before," conceded Vance Clark, the agency's administrator at the time.

The audit faulted the agency for not utilizing "the most effective way to minimize delinquencies" among its loans. But Clark said agency officials never asked for credit reports because they wondered how useful the reports would be.

"How do you get a credit report on a farmer?" Clark asked. "A farmer will owe money to a feed company, an equipment dealer and several other creditors. There's really no central clearing point for all of that information."

The Farmers Home Administration is currently working to implement regulations that require its offices in each county to obtain credit reports on loan applicants. An agency spokesman said those rules should be in place later this year.

And auditors said a $110 million computerization program begun during Clark's tenure improved record-keeping at the agency, allowing it to cross-check its loan applications against its existing files.

But the new computer didn't account for congressmen reluctant to get back the taxpayers' money from the farmers.

Congress in 1987 forced the agency to change its lending standards so that delinquent borrowers could get "operating loans" to keep their farms going. The Farmers Home Administration had tried such a "continuation policy" in the early 1980s only to abandon it because many of those new loans turned out to be "unsound," a General Accounting Office audit said.

Reinstituting that policy increased government costs by $717 million in fiscal 1988 alone, the Farmers Home Administration estimated.

"It's not a good situation," conceded Neal Sox Johnson, the agency's interim administrator from 1988 through this March. "We should only be giving money to farmers that have a reasonable chance of success."

Congress adopted those looser standards after a fight with Clark, who had proposed tightening them. Losing such a battle is nothing new for the Farmers Home Administration, which has long found itself at the mercy of farm-state congressmen and the farm lobby.

"That agency is jerked six ways to Sunday," said Harman, the government auditor.

Under Clark's proposal, the agency would have considered a loan applicant's assets and his chances to turn a profit before granting the loan. Previously, the agency awarded loans to farmers who merely indicated that they could break even.

A General Accounting Office audit found that the new standards would have screened out 56 percent of the borrowers it sampled.

Not surprisingly, the new rules created a stir in farm country and among rural congressmen such as Rep. Jamie Whitten, D-Miss., chairman of the House Appropriations Committee.

Nicknamed "the permanent secretary of agriculture" because of his power and willingness to use it to boost farm programs, Whitten unleashed an all-out assault on the new lending standards.

"Jamie Whitten really beat me up," Clark said.

Feeling the heat, Clark said he had no choice but to withdraw his proposals.

Whitten refused requests for an interview. But congressional testimony from 1987 shows Whitten and other congressmen taking a hard stand against Clark's proposals.

Whitten said Clark's tougher lending standards were proof of "what seems to be the administration's disregard for the traditional Farmers Home borrower." He also peppered Clark with tough questions suggesting that the regulations were "intended to discourage borrowers from applying for Farmers Home loans."

In the testimony, Whitten indicated that it was unfair for the Farmers Home Administration to get tough on borrowers after "literally throwing money at farmers in the 1970s." Instead, he said, it should work with borrowers to see them through the tough times.

"We were looking out for the family farmer," explained Rep. Glenn English, D-Okla., chairman of the House Agriculture subcommittee that oversees the Farmers Home Administration.

Whitten, English and the other members of the House and Senate agriculture committees were merely reflecting the thinking of farm lobbying groups, whose leaders still were convinced that borrowed money could cure all farmers' ills.

"We knocked Farmers Home as much as anybody else did back in 1987," said Mary Kay Thatcher, assistant director of the American Farm Bureau Federation. "But times have changed considerably since then, and we're starting to realize that maybe we've gone a little too far to protect borrowers' rights."

Congress' last attempt to protect Farmers Home Administration borrowers was the Agricultural Credit Act of 1987, which spelled out a series of steps the Farmers Home Administration must take in lieu of foreclosing on delinquent farmers. If restructuring or rescheduling the loans won't work, the agency can forgive them in part. And rather than repossessing farms, the Farmers Home Administration must allow farmers to "buy out" their loans, paying only the appraised value of their property minus what the agency would have spent on foreclosure proceedings.

The Farmers Home Administration can foreclose if a borrower falls behind on the new loans he got to keep his farm operating. But even then, the Agricultural Credit Act allows him to lease or repurchase his property from the agency.

"We've rewritten quite a few loans," said Frank Bly, district director for the Farmers Home Administration in Western New York. "If you can rewrite the loan, that's what you're supposed to do."

Bly said it's only fair to rewrite as many loans as possible.

"Remember, these loans aren't falling behind because people didn't want to pay," he said. "It's because they couldn't pay them."

Even so, the legislation has stirred some resentment in farm country, where plenty of farmers tell tales of breaks their neighbors received but they didn't.

"There's one guy around here who got 50 percent of his debt written off -- and later they lent him more money," said Dan Gabel, a farmer in Dayton.

The credit legislation from 1987 is expected to cost the agency about $9.4 billion, but even critics of the Farmers Home Administration said the situation could have been worse without those new rules.

That's because federal court injunctions have hampered the agency's foreclosure plans in recent years. With an injunction in effect, and without the credit legislation, the Farmers Home Administration would have had no way to deal with its most delinquent borrowers, meaning its losses could have been even greater.

Instead, the credit legislation allowed them to collect something from those borrowers.

"Given the situation, which was and is pretty bad at Farmers Home, the Ag Credit Act hasn't worked that badly," said Jerry Hansen of the Center for Rural Affairs, a Nebraska organization that has criticized the agency for helping farmers doomed to failure while ignoring beginning farmers.

The court battles over the Farmers Home Administration's foreclosure plans began in 1983, when former North Dakota farmer Dwight Coleman sued to stop the agency from foreclosing. Coleman claimed that the agency hadn't properly explained its procedures to borrowers, and U.S. District Judge Bruce Van Sickle agreed, issuing an injunction that resulted in the number of foreclosures falling from 844 in 1982 to 89 in 1985.

The Farmers Home Administration responded to a court order by issuing new regulations. Foreclosures resumed, but Coleman sued again, claiming that the agency hadn't fully stated farmers' legal rights in foreclosure proceedings.

Again Van Sickle issued an injunction -- this time putting a halt to almost all of the agency's foreclosure efforts. The number of foreclosures again fell, from 233 in fiscal 1987 to 58 the next year.

"Those cases threw a monkey wrench into our plans for the longest time," said Clark, the agency's former administrator.

Foreclosures were free to begin again after an appeals court ruled in January 1989 that the agency's new rules were indeed fair to borrowers. But the court case, Congress and the Farmers Home Administration's own policies had already done a lot of damage by then.

The agency's farm-loan losses were approaching $40 billion, and its borrowers nationwide were still struggling.

"We looked at one borrower who had borrowed a half a million dollars," said John P. Hunt Jr., who worked on several of the General Accounting Office audits of the agency. "He had been borrowing from Farmers Home -- which is supposed to be a temporary loan program -- for 28 years. And yet, his net worth was lower at the end of those 28 years was less than it was at the beginning.

"You look at that and you say: Is this the best way to help a farmer?"

TUESDAY -- A move for reform.

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