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Richard Nelson, a dairy farmer in this Chautauqua County community, knows plenty of farmers who are drowning in debt -- and he thinks the Farmers Home Administration should let them drown.

"To me, Farmers Home should just bankrupt those farmers out and auction off their property," Nelson said. "Right now, Farmers Home is just bleeding tax dollars, and the country can't afford it."

Sixty miles away, in Attica, Larry and Denise Fugle worry that they could be drowning themselves. They are struggling to keep their farm going, partly because the Farmers Home Administration is becoming stingy.

"Farmers Home should not be in the business of setting people up to fail," Mrs. Fugle said, "but that's exactly what they're doing."

In trying to reform the Farmers Home Administration, the federal government will have to deal with thousands of farmers who agree with Nelson, without hurting thousands who are suffering like the Fugles.

That will be a tricky task, but government officials say it has to be done. The agency's farm programs already have lost $39.6 billion -- nearly half the value of the goods all of America's farms produce in a year -- and the losses are not likely to stop there.

The General Accounting Office identified the Farmers Home Administration as one of 14 government programs at high risk for "major losses" in the next few years. The main reason: As of last Sept. 30, nearly half of the agency's $23.3 billion in direct farm loans was owed by borrowers behind on their payments.

Worse yet, Congress' previous efforts to solve the agency's problems appear only to be delaying doomsday for farmers nationwide.

Under the Agricultural Credit Act of 1987, nearly 10,000 farmers have had their loans restructured or partially forgiven to get more manageable payments. Yet, when the General Accounting Office studied 160 of those borrowers, only 9 percent "had favorable financial potential" to succeed without more government help.

"They're feeding a dead horse," Nelson said.

"The government doesn't have the money to carry all that farm-sector credit," said Neal Sox Johnson, the agency's interim administrator from 1988 through March.

With those two thoughts in mind:

Congress is working to eliminate some of the breaks that delinquent farm borrowers got under the Agriculture Credit Act of 1987 and that have allowed a few fraudulent borrowers more than $1 million apiece.

President Bush has proposed a major overhaul of the Farmers Home Administration in his 1990 Farm Bill proposal, and members of Congress promise to take a closer look at the agency in 1991.

Farmers Home is lending less government money to farmers and is pushing an already troubled program in which the agency agrees to pay back farm loans made by private lenders in case they go bad.

In reforming the Farmers Home Administration, Congress has begun by trying to fix what successful farmers complain about most: the credit legislation of 1987. Under that bill, the agency's most troubled farmers can get much of their debt forgiven and even get first dibs on buying their property back if the agency forecloses.

Since the bill doesn't cap the amount of aid a farmer can get, nearly 100 farmers nationwide have gotten breaks of $1 million or more, the agency said.

"You and me and the other taxpayers pay for that," said Ralph Hurlburt, an Ellicottville farmer who served on the Cattaraugus County committee that reviews the agency's loans.

Eight of those million-dollar breaks went to borrowers who defrauded the government, according to the agency's own figures.

In January, the Farmers Home Administration sent Congress a list of 218 borrowers who had committed fraud yet were involved in buying out their loans at a discount. Some of those borrowers overpaid other lenders just so they could default on their Farmers Home Administration loans or simply failed to pay Farmers Home even though they could.

"Some non-delinquent borrowers told us that they were looking for ways to become delinquent in order to have their Farmers Home debt reduced," John W. Harman, director of food and agriculture issues for the General Accounting Office, told a congressional panel earlier this year.

Congress already has moved to close those loopholes. The House approved a bill in March to limit debt forgiveness to $250,000 per borrower and prevent fraudulent borrowers from being eligible for breaks on their loans. The Senate has included similar provisions in its 1990 Farm Bill proposal.

Despite those likely reforms, most delinquent borrowers will continue to be eligible to have their loans restructured under the 1987 credit legislation -- whether it helps them or not.

That's not the way the Farmers Home Administration used to operate. Nelson borrowed money from the agency to get started in farming in the 1960s and paid it back.

In those days, the agency's job was to get farmers started.

"We want to return Farmers Home to its traditional role," said La Verne Ausman, the agency's new administrator. "We want to provide credit to beginning farmers and to those who have financial setbacks through no fault of their own." He does not want loans to go to those who struggle for years or decades on end.

In keeping with those goals, the Bush administration has proposed:

Rules that essentially would force every farmer to repay all their Farmers Home Administration loans within 17 years of their first loan.

Limiting every borrower to $100,000 in direct operating loans, down from $200,000.

Changing lending standards so that borrowers would be required to have excess income to cover emergency expenses and equipment replacement costs.

Eliminating the agency's "continuation policy," which forces the agency to lend more money to delinquent borrowers to keep their farms going.

Rep. Glenn English, D-Okla., chairman of the House subcommittee that oversees the agency, said the Farm Bill is so complex that the House won't have time to consider more reforms at the Farmers Home Administration this year.

A move for reform has started now because the farm economy has improved, leaving successful farmers with less tolerance for competitors who don't pay their bills, said Rick Zimmerman, director of governmental relations for the New York State Farm Bureau, a farmers advocacy group.

"Farmers Home should not continue to give breaks to one farmer in competition with another," Zimmerman said.

That's exactly what the Farmers Home Administration has been doing for decades. Struggling farmers now can get farm operating loans from the agency at an interest rate as low as 6 1/4 percent -- 5 to 7 percentage points less than they would have to pay a bank.

Over the years, those breaks add up to big dollars. A 1988 government study found that one Indiana farmer got a $127,932 cash advantage over 15 years because of the agency's lower rate.

To stem its losses, the agency has been cutting back on the loans that offer such lucrative interest rates. In 1987, Congress eliminated the agency's economic emergency loan program, which resulted in the bulk of its losses in the mid-1980s. And in recent years, the agency has stressed guaranteed loans through private lenders over loans from the agency itself.

Ausman said the agency is emphasizing guaranteed loans because they cost the government less, since the government has to shell out for these loans only if they turn sour.

Unfortunately, while the amount of guaranteed loans is increasing, the number of bad guaranteed loans is growing even faster. The General Accounting Office reported last fall that delinquencies on guaranteed loans increased 46 percent between fiscal 1987 and 1988, to $134 million.

As in the agency's direct loan program, the agency failed to thoroughly check whether farmers in the guaranteed program could repay what they borrow.

Auditors also found that guaranteed loans aren't going to farmers who need them most. A 1988 inspector general's audit found that 99 percent of the 15,585 guaranteed loans studied went to farmers who already were customers of the banks -- meaning the banks were using the government program to protect themselves rather than to help struggling farmers.

As a result, the General Accounting Office study said, borrowers who once would have gotten direct Farmers Home Administration loans can't get credit at all. So, Farmers Home -- which in the 1970s led farmers on a borrowing binge that they're still paying for -- now might be responsible for a credit crunch.

Farmers who have come to depend on Farmers Home Administration operating loans to put in their crops in the spring now say the agency may take three or four months into the planting season before approving the loans, if at all.

That only makes matters worse for troubled farmers, said Jim Ellis, a farmer in East Otto.

"It's like waiting six months to give a blood transfusion to a guy who needs one now," Ellis said.

The Fugles know how that feels. After about a decade of lending them money, the agency turned down their application for more help after officials talked as if they might approve it.

So the Fugles continue to struggle, cutting back on the money they spend on fertilizer and new equipment.

Ausman acknowledged that changes at the Farmers Home Administration probably will hurt some farmers. But he said something has to be done to put the agency's house in order.

Then again, only so much can be done.

"You're never going to have a lender of last resort with adequate credit policies," Ausman said. "All we're saying is that this should be a program where the borrowers ought to have some chance of success."

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