am not going to give you a temporary injunction now." A year passed, and the Government said, "Your Honor, we proceeded on the strength of the indications we got from the court." Our argument, of course, was that they proceeded at their own risk and gambled, and when you gamble you've got to pay to play.

I think the judge felt there was some need to balance out what he felt to be, I guess, the overall public equities. And of course, we strongly disagree with that, and we think it is unfortunate. We are going to ask him to reconsider that part of the order.

Senator HARKIN. I am sorry, Mr. Chairman. Thanks Jim, for that explanation. I do not know that it really clears it up, but, I understand the explanation. I am just not sure that it is correct. Mr. MASSEY. Well, we are not happy with it obviously. Senator HARKIN. Are you happy with half of it?

Mr. MASSEY. Yes. We are happy with the part that works, and our clients are not happy obviously with the exclusion.

Senator HARKIN. Ralph, let me say that your suggestion on the set-aside is a good suggestion. We will see if we can get that put in the bill. It is an excellent suggestion that we make sure, where there is a minority group in any county, there is some land set aside and make sure that the minority group's members receive that land.

Mr. PAIGE. As precedent for that, SBA already has set-aside.
Senator HARKIN. Yes, absolutely.

Mr. PAIGE. And the recent defense, set-aside; for some minority contractors, and I think this should be the same thing.

Senator HARKIN. Precisely. Thank you all.

Senator CONRAD. Thank you. I want to thank the entire panel. We appreciate it very much. Let me just say that we still have four witnesses, and we have to be out of this room at 12:30 pm. That means I am going to ask all four of the remaining witnesses to join us at the table now. That would be Gary Bergstrom, the vice president of the National Bank of Harvey of Harvey, ND; Lonnie Parsons, the Western State Bank of Devils Lake, ND; Cecil Huff who is a dairy farmer and cochair of the Credit Committee of the National Save the Family Farm Coalition of Ava, MO; and Dr. Max Glenn, a farmer and executive director of the Oklahoma Conference of Churches.

If all of you would take your positions and I think in order for us to meet our time commitment, we are going to have to limit each of the witnesses to a 7 minute statement. All of the statements will be included in the record. If you can summarize your statement for us in 7 minutes, that will leave us a little bit of time for questions, and we will proceed from there.

Gary Bergstrom, president of the National Bank of Harvey, welcome. Thank you for coming and for participating in this hearing, and if you would proceed with your testimony.

STATEMENT OF GARY BERGSTROM, PRESIDENT, THE NATIONAL BANK OF HARVEY, HARVEY, ND

Mr. BERGSTROM. Thank you. It is an honor to be able to share some of the thoughts from my perspective relative to functional changes, primarily, what I think would be of help in making

FmHA programs more usable. Some of the testimony heard earlier leveled a lot of criticisms at banks for not using the guarantee program. So I will specifically have some of my remarks refer to that particular problem.

Our bank is about $23.5 million in total assets, and Harvey, ND is 2,600 in population. I think that it is imperative that we find a way to send cost efficient funds to agriculture in North Dakota, or small towns like ours, including the business communities that support these farmers are going to dry up.

We have already seen tremendous signs of that happening in many towns. Particularly, as far as we are concerned, we have been very active in using SBA loans to finance small businesses over the past few years. We find the program works quite well. In fact, we have an extraordinary relationship with the SBA regional office and are able to accomplish many things, and of the 30 to 40 loans that we have made in recent years we have only had one loan to this date go bad-that did not make it. So I think we have some amount of success in this, and I think that helps build our rapport.

We have not used the Farmers Home Administration guarantee in the past because of several things, and I think it is a program that could be used if there were primarily three or four changes made to it so that it would be more usable by bankers. The first change that I think needs to be made to the guarantee is how the loan is paid out, how the guaranteed portion is paid out upon default.

And I think that basically what it amounts to in an SBA loan the guaranteed portion is paid out, I believe, and I am not an attorney, and I do not have all the legal ramifications and answers, but I believe it is 90 days after it has been declared in default, the person holding that guaranteed portion can request a payout. And it tends to lend a lot of confidence in the secondary market, or the holders of those guarantees, that, indeed, this is a type of loan that will be paid out promptly and, therefore, when they are bidding for those funds in that secondary paper, they will pass on more cost efficient, lower rate funds to the borrower, which I think has to be done.

Senator CONRAD. What happens with the FmHA guarantee program?

Mr. BERGSTROM. As I understand their policy, you have to go through the liquidation of the borrower first, and then it is paid out on the loss that is incurred. It is not upfront and then you liquidate. It is liquidate first and then pay off the guarantee afterward. And with the current bankruptcies and so forth, that might be years and years down the road.

Senator CONRAD. So that makes it very unattractive for a banker to cooperate.

Mr. BERGSTROM. Right. It is primarily the banker and the secondary markets that you are probably going to be working to sell that guaranteed paper through like we do SBA loans.

Senator CONRAD. OK.

Mr. BERGSTROM. So that is one area that needs to be changed to make the guarantees more workable.

The second change is some more of what has been addressed here, and that is the seemingly adversarial role rather than cooperative role that we have with a number of the FmHA programs as opposed to the SBA programs. I am talking about the loan servicing. Banks in FmHA, and like I say, we do not have first hand experience in this because we have purposely shied away from guarantees in the past, but I do not think that we can any longer do so. Bankers that I have talked to have to fight tooth and nail to collect on the guarantees.

In fact, I have heard it said that the only way to collect on an FmHA guarantee is to go to court and fight FmHA so instead of trying to collect from the borrower as much as possibly can be collected, they spend their time in court fighting each other. And that has to be changed. One of the areas that they tried to discount the banks in is the area of loan servicing. And for minute and inconsequential loan servicing differences, things that the bank may not agree with with FmHA, or if the farmer sells some grain in the son's name or something that the bank has no control over, which happens when farmers are in dire straits, then, the FmHA wants to blame the bank and not hold responsible on their guarantees. Senator CONRAD. So what we are talking here about is an attitude, lack of a cooperative attitude?

Mr. BERGSTROM. That is correct.

Senator CONRAD. I guess we saw that here this morning.

Mr. BERGSTROM. Right. I do not see any reason why that cannot be established similar to the program that we work with the SBA. Senator CONRAD. In other words, you have had a good experience with SBA? You get a cooperative attitude there that is lacking with FmHA?

Mr. BERGSTROM. That is right. And part of it may be due to the previously unattractive package that FmHA guaranteed loans present so they were not widely used, and we have not built up that rapport.

Senator CONRAD. OK.

Mr. BERGSTROM. The third, and probably my most pet issue, is that of the family size farm definition regarding loan guarantees. We arse supposed to help out, do what we can to keep some of these farmers on that land. The eligibility for a guaranteed loan in half of our applications were thrown out because of the family size farm. And I could sit here and I could show you that the man and the wife farm the land, and maybe they use a little help in the spring and a little help in the fall to get that crop in and off.

It is a family size farm. They work a little harder, a little longer, but they-

Senator CONRAD. What size is the farm that we are talking about here?

Mr. BERGSTROM. In my particular area, and I have letters to all the congressional people dated March 1985, and I have responses from all of them. So I have been harping on this since 1985, and I have responses back from the Department of Agriculture in writing that says acres cannot be a determinant in family farm, and yet on the application the only thing that is asked is how many acres do they farm besides the financial information.

Senator CONRAD. And then they reject it on the basis of not being a family farm.

Mr. BERGSTROM. And then they reject it. We have been through adverse hearings. You might as well stay home because you cannot win. So we have been through all of that, and I have just almost given up on that part until I got a chance to put my plugs in here.

I suggest that FmHA loans under the guaranteed program should have different limits set than the direct loans. Most of these borrowers that we are talking about have a little more equity than the direct loan customers that we are talking about and the requirements would not have to be that tremendous so that we are handling huge operations. We could limit real estate loans to so much, equipment loans to so much, and operating loans to so much. And have an aggregate total that a combination of those loans could not exceed.

Or if it was felt necessary, you could also put some things in regarding gross income requirements. And I do not think it would open the door to extremely large farm situations.

The fourth thing that I agree something has to be done, and it is hard to determine exactly how to do it, is those dealing with restructuring the debt that is currently there. The recognition of the undersecured position of a lender is hard to accept some times, and what to do about it. I do not think that Farmers Home's reluctance to want to forgive debt and so forth is anything new. Historically lenders-you know, you hate to have a tradition of allowing thatwhat happens when you make an unsecured loan? It is thought that is going to be paid back on the integrity of the person and so forth.

But the realities of the situation have to come to the forefront that indeed we have some undercollateralized situations. We have situations that will not cash-flow, and if we do not do something about it, they will all end up in chapter 12 which is-

Senator CONRAD. Total loss.

Mr. BERGSTROM [continuing]. Mandatory mediation or everybody loses, and you go through the foreclosure and you go through all the expense on both sides of chapter 12 and so forth. We have found that we have so many people that cannot qualify for guaranteed loans because of size limitations or this reason or that reason, and we have even instituted our own loan buydown program within our own bank. We even asked, well, what if we▬▬

Senator CONRAD. Let me ask you this. You have instituted your own loan buydown program?

Mr. BERGSTROM. That is correct.

Senator CONRAD. Is your record as poor as FmHA? They have used 6 percent of the funds available in their program.

Mr. BERGSTROM. We have not been allocating specific number of dollars to that program. We have been using it where it needs to be used. There is a number of criteria and basically what I find about debt writedown and so forth, and Mr. Clark referred to the problem. If you write it down and you have an ongoing operation, that is terrible. I agree in some respects that if you write it down, many times you expect to liquidate and get done with that credit and be done with the headaches.

In reality, it is hard to use that way, unless you want to lose just a whole lot of money. I guess that is basically what we are here for is that in many cases you can lose less by restructuring, by doing some of these things and we have had to do that. We have tried to make determinations as to whether that operator is a good operator. Does he have good production? Does he have a trusting relationship yet with the entity, whether it is the bank or whether it is Farmers Home Administration? I think those two points are-Senator CONRAD. Fundamental.

Mr. BERGSTROM. That is fundamental. If you have those things, then you maybe can go on, and also maybe what is the person's attitude. Does he think he can make it if he gets a chance.

Senator CONRAD. We are going to have to go on to Lonnie. Let me just indicate to you. I was a creditor. Many times as the State tax commissioner, as you know, Gary, tax commissioners are put in the place of being creditors just as bankers are, just as Mr. Clark is. It does not take any great length of experience to find out very quickly that in many cases you are simply better off to restructure than to go through the cost of foreclosure and liquidation, and from what I hear that is what you are saying.

Mr. BERGSTROM. I might make one more point, and that is in many cases we are trying to restructure as a bank a credit, and we get basically the various segments of the creditors to go along with the plan. We get the borrower. Many times we are sitting there with the borrower's attorney, putting together these plans, trying to work something, and somebody, for example, Farmers Home will not go along with the program. So what do you have-all your work has been for nothing.

If they do not have the authority to be able to work into that plan, it is all for naught. There was one interesting note that I just found out the other day, and that has to do with deferrals. We talked a little bit about deferrals, and we have requested a number of deferrals or some of our borrowers have from FmHA, and some of them were granted.

Recently they must have had some policy changes regarding those on how you project your income and expense for justification for using those deferrals. Before I think you could use 3 percent a year or something, more increase in income over the 5-year period, and the same level of expense basically. Now I understand from what our county supervisor told me is that now they have to use less income and a little more expense over the same period. So that any that he has seen so far, none of them would qualify under the current interpretation.

Senator CONRAD. Thank you very much for that.

[The prepared statement of Mr. Bergstrom follows:]