Farmers cannot survive long when FmHA refuses to release. A 100% wage garnishment is not allowed for wage-earners; a 100% seizure should not be allowed for farmers.

SECTION 9. Homestead Protection.

This section shores up congressional intent in the 1985 Food Security Act. The elimination of the $40,000 limitation will help small and minority farmers. It allows homestead retention as well as essential outbuildings. The consideration of rent helps those who were shut down by economic hard times but who still with to keep their home. It also allows negotiation of homestead retention before loss of title to FmHA. We support its adoption.

SECTION 10. State Policy Boards.

If FmHA is viewed as an economic development program for rural America, then it is the best program that rural America has. It provides capital and good loan terms to over 240,000 small business (farms) throughout America. We very much want FmHA to continue its historic role and function in rural America. The complexities of FmHA programs and the impact it has on each state for good and for ill, means that local oversight and collection of data is much needed. The state policy boards would be very helpful to ensure proper directions and sound administration and to correct problems before they become crises. We therefore support the establishment of state policy boards.

The Attorneys General Spaeth, Humphrey, Miller, and Hartigan would be please to help this Committee in any way possible. Thank you for the opportunity to testify.

WORKSHEET FOR ACCEPTING INVENTORY PROPERTY

ATTACHMENT A

The following estimate should cover the full time it is estimated that PHA would have the property in inventory.

Fir. Ha cap
rate sic

24192 [FROM PART 5 of Form 422.1

Essential Repairo

222,000

Yearly 2

Land Decrease

Holding * Period

& Regall

Holding x Period

2

2

6864 [ Bldg value x 5%] •1210 [ RENTAL X 5%]

422-1A B

30.770 [ND 422. 1A 8 xh yones]

Renate Expenses (Commissions, Advertising, etc.)-| |,100 [ 5% of MARKET VALUE]

SECTION 3. Loan Servicing.

Section 3 would require timely notification of servicing

options.

Judge Van Sickle's May 7, 1987, Order stated that the information statutorily required by this section is required also as a matter of constitutional law. However, you should be aware that Judge Van Sickle (who is clearly aware of FmHA's predilection to keep information from borrowers by use of bureaucratic obfuscation and incredibly complex language and forms) also ordered that the explanations provided by FMHA be "clear and readable" We support adoption of section 3, but urge that you add requirements that all explanations be "clear and readable." Although we believe the Judge Van Sickle decision would be upheld on appeal, adoption of this section would prevent FmHA from filing an appeal.

SECTION 4. County Committees.

Section 4 is clearly in reaction to FmHA's largely successful attempt to subvert the 1986 election required by the Food and Security Act of 1985. Nicholas Spaeth, Attorney General of North Dakota, Governor George Sinner of North Dakota, and many others protested when FmHA issued ex parte interim regulations which largely disregarded congressional intent to democratize the FmHA county committee structure on May 22, 1986. 51 Fed. Reg. 18763. FMHA is still using the interim regulations and has apparently made no evaluation of the public comments it received. As a result of these regulations, FmHA has caused unnecessary litigation. See, e.g. Hedge v. Lyng, Civil Action No. 4-86-610, D. Minn.

The major reforms in this section of S. 1147 are to specifically allow FmHA borrowers to be on county committees, subject to conflict of interest standards set forth in Section 1336. and to require FmHA to give adequate time to voters to nominate and elect suitable candidates. We urge that it be adopted

SECTION 5. Appeals Procedure.

Inclusion of the three magic words "on the record" is, after the debt settlement provisions of § 1 of S. 1147, the most important reform in this bill.

FmHA now has all appeals heard by FmHA employees who have no legal training and who are integrally connected to the persons whose decisions are being appealed. In adopting its appeal regulations in 1982 FmHA stated that "a special independent body of government employees to handle only FMHA administrative appeals" would provide "' a better unbiased system of review." Independent hearing officers were rejected, however, due to FmHA's

See

perception that the cost would out weigh the benefits.1 "Supplementary Information" preceding 7 C.F.R. 1900, 47 Fed. Reg. 13758, April 1, 1982.

We disagree. The benefits in having administrative law judges review FmHA appeals far outweigh the costs.

Let us first look at some of the areas in which USDA now affords the use of ALJ's. These include appeals under the Animal Welfare Act, Egg Products Inspection Act, Federal Meat Inspection Act, Federal Seed Act, Poultry Products Inspection Act & Horse Protection Act. See 7 C.F.R. 1.131. Owners of condemned cattle, horse, and poultry carcasses and condemned or contaminated eggs and seeds have more due process rights under federal law than do owners of family farms who borrow from the FmHA. The owner of a condemned chicken carcass has access to an ALJ on a hearing challenging the condemnation; the family farmer fighting to save his home, farm, livestock and his life's investment does not have access to an ALJ. This makes no sense. To put it very bluntly, we believe farmers should have at least the same due process rights as a condemned chicken carcass.

Why are ALJ's necessary? First, FmHA district directors and assistant district directors generally have college degrees in animal husbandry, soil science, agricultural economics or other related degrees. They do not have law degrees. Yet they are asked to determine the correctness of the decision under appeal in light of the statutes governing FmHA. These statutes are, quite simply, inaccessible. There are no copies of the United States Code in FmHA offices even if the FmHA district director knew how to find or interpret the applicable section. Moreover, many of the issues presented to the hearing officer require a determination as to whether the particular regulation at issue is in fact consistent with the law. Many are not, as was graphically illustrated to this Committee a short while ago in connection with FmHA's January 15, 1987, proposed regulations. Finally, issues of interpretation of the terms in mortgages and security agreements require a knowledge of state real property law, the Uniform Commercial Code, general contract law and choice of law principles. FmHA loan officers are simply untrained and unschooled in these areas.

1The "excessive cost" to FmHA was determined by a cost study which included such assumptions as the hearing officers would use driving speeds of 35 miles per hour, trips of over 105 miles one way would require an overnight stay, and all trips over 300 miles (150 one way) would be by air. See May, 1980, Analysis of Appeals Process, available from FmHA. This cost study "proves" that Washington consultants don't leave the beltway. Not even grandmas drive 35 miles an hour in rural areas.

Second, the use of FmHA employees to rule on co-workers' decisions creates an unacceptable risk of favoritism and bias because of the interplay between serving simultaneously as "prosecutor" on some adverse actions while serving as hearing officer on others. For example, in North Dakota, in the six-month period between October, 1986, and March 31, 1987, FmHA sent over 2,000 notices of intention to take adverse action, each giving the borrower a chance for a hearing before a district director (or assistant district director). There are only six districts in North Dakota. The human temptation to process the other guy's foreclosures because he has some of yours must be compelling. Even if FmHA employees try to act impartially, the present situation of simultaneous dual roles creates too great a risk of unfairness.

FMHA has claimed that there is nothing wrong with the present appeal system because of the very high percentage of decisions that it upholds. This analysis is obviously flawed. A comparison to the Social Security appeals system which use ALJ's shows this fallacy. In 1982, 52.7% of all Social Security decisions were reversed by ALJ's on appeal. Operation Report of the Office of Hearings and appeals, Dept. of Health and Human Services, Social Security Administration, Sept. 30, 1982, 55 A. Pub. No. 7-032 (5-83), at 19. Less than 10% of FmHA's adverse actions are reversed on appeal. There is no reason to believe that Social Security field workers are more than five times as inaccurate as FmHA field workers. The difference is that the FmHA appeal process is flawed and fails to require a searching reexamination of internal decisions.

Before closing, one last benefit should be addressed. FmHA appeals take a great deal of time from FmHA supervisors. Overall administration of the program would be improved by use of ALJ's. FmHA is in the most stressed period since the Great Depression. Its workers should administer FmHA loans, not devote scarce time and resources to hearings.

SECTION 6. Compliance with State Law.

We strongly support section 6 of the bill. As you may be aware, FmHA has flatly refused to participate in state mediation programs required by Iowa and Minnesota law. These programs are worthwhile and their successful approach to conflict resolution has been proven. For example, as of February 20, 1987, more than 3,500 mediations had either been completed or were currently in progress in Minnesota. Of these, 2,016 had resulted in debtor creditor agreements: 1,524 during mediation, and 492 outside of mediation. Figures for Iowa are comparable. It is clear that mediation works. It helps keep farmers on the land, creditors in business, and most importantly, it has significantly reduced the threat of violence in the rural areas. Moreover, recent data indicates that mediation is a viable alternative to bankruptcy. An analysis completed by the Center for Rural Affairs indicates that states with mediation have proportionately fewer chapter 12 filings. There is simply no good reason for FmHA to refuse to participate in state mediation programs.