Hearing on Financial Services Modernization

Prepared Testimony of Ms. Katherine Ozer
Executive Director
National Family Farm Coalition

4:00 p.m., Thursday, February 25, 1999

My name is Katherine Ozer. I am the Executive Director of the National Family Farm Coalition (NFFC). Our coalition represents 31 grassroots family farm and rural advocacy organizations in 35 states that are working together to ensure that family farmers and rural communities have a viable future in the overall economy. Our work has focused on both federal farm commodity pricing policy and credit issues.

I appreciate the opportunity to be here today to express our very strong concerns about the draft Financial Modernization legislation and in particular its effects on the Community Reinvestment Act (CRA). Since most farmers are not in control of the price they receive for their farm commodities at the farm-gate, changes in interest rates, the availability, and the terms of credit add to the volatility of their operations. It often makes the difference of whether farmers can cash-flow and remain in business for the next year. If in financial trouble, the terms of credit including available refinancing often makes the difference for the future. In 1999, farmers face the worst financial conditions in more than a decade. Increasing concentration and vertical integration in the food production, processing, and marketing system is directly contributing to the current crisis. Farmers and rural communities are feeling the ripple effects of a misguided domestic farm policy linked to exports and a weakened global economy. U.S. financial institutions have made unwise types of investments both in the U.S. and abroad. We need a stronger community reinvestment policy and a new role for the government in ensuring that there is "safety and soundness" in our financial institutions.

NFFC has serious concerns about the proposals to expand "bank-type" services to other types of institutions and conversely to allow existing regulated government sponsored entities such as the Farm Credit System to enter into non-farm lending. Expanding the bank's portfolio into the insurance business further compounds the risk for family farmers and rural communities by greatly expanding the concentration of capital. We have already seen a resurgence of 18% interest rates with burgeoning credit held by local implement dealers, seed dealers, and on consumer credit cards. These are family farmers who have been unable to cash-flow regular credit at their commercial banks due to low commodity prices and interest rates above 10% and have not been able to receive the scarce subsidized credit funds available through USDA's Farm Service Agency. As farm prices hit record lows, these creditors on Main Street and through major bank subsidiaries will be part of a very messy foreclosure and bankruptcy process. The tools available for farmers through FSA credit, commercial banks, and the Farm Credit System will look good compared to a questionable "free market" in a newly "modernized" financial sector. This mingling of financial activities under a reduced regulatory framework at a time of increasing economic uncertainty is very problematic. Across rural America, Chapter 12 bankruptcy filings are increasing as is the demand for government assisted credit - whether in the form of direct, guaranteed, or emergency credit.

When discussing the latest proposals regarding the Community Reinvestment Act (CRA) among our member organizations, the response has been the need to strengthen the existing CRA, not weaken it. The types of loans and the structure of the farming operation that receives the loans needs to be reported. Today, we are seeing a major increase in the amount of capital that is being loaned to farmers based on having a production contract. These contracts are being viewed as "collateral" where an independent farming operation, despite years in operation, is being denied credit. These loans are neither safe nor sound since the contracting company can pull the contract at anytime as we have seen repeatedly in the Southeast with poultry and hogs. The maximum FSA guaranteed loan limit for operating credit was raised from $400,000 to $700,000 this past October. We need new reporting procedures that document how much of a specific bank's loan volume is to farmers holding these very volatile contracts.

The current draft legislation is a major step backwards in ensuring a level of accountability of our nation's lending institutions. Disconnecting the CRA rating from an individual bank's ability to engage in other types of financial services undermines the usefulness of the entire process. Stripping CRA of enforcement mechanisms and removing penalties for failing to maintain a satisfactory CRA rating means that banks will no longer feel any public pressure to comply with the provisions of the law. A strong CRA is important to rural communities. It is needed to prevent rural banks from abandoning their commitment to serve the millions of Americans living in low and moderate-income communities. Unfortunately, small commercial banks do not automatically reinvest in their local communities. This is documented by national data on reinvestment trends and loan to asset ratios for banks across the country. Fifty percent of small banks have a loan to deposit ratio below 70% with 25% of these having levels less than 58%.

When banks are proposing to merge or expand services, there needs to be access to their history of lending to all members of the community. We know that in just one example in Alabama, a review of the Home Mortgage Disclosure Act (HMDA) data showed that of the 26,000 loans outside of SMSA's that were reviewed; there were zero loans made in majority black census tracts. The fair distribution of credit remains a very serious issue. The need for this information to be public is essential. The safe harbor provision in this bill would eliminate the public comment opportunity and further close the door on public access to lending information. The national statistics reveal that 95% of all banks would fall under the safe harbor. In Wisconsin, the level is even greater; with only one bank out of 351 regulated commercial banks having received a "needs to improve" rating in June 1996.

In Wisconsin, rural advocates recently filed a challenge to Star Bank's acquisition of Firstar citing Firstar's unprecedented $42 million drop in farm lending since 1995. This is the type of information that must be kept public so that citizens have the tools and information to document the situation that will affect their future access to capital.

Last year, over fifteen state, regional, and national farm and rural organizations joined together to oppose the Senate amendments that would have seriously weakened CRA coverage. These groups ranged from family farm organizations, religious groups, Native American advocacy organizations, housing, and rural community organizations. We recognize that the future credit needs of rural communities must be met by increased access to affordable credit that is serviced with a view towards the impacts on the local and/or regional economy; not national and international investment pressures.

The upcoming debate on "financial modernization" is one in which family farmers and rural citizens have a great stake. I thank you for the opportunity to be part of today's hearing. I will be happy to answer any questions.

Home | Menu | Links | Info | Chairman's Page