Farm Credit System trying new ways to save shaky loans

Caught in the worst flow of red ink it has ever seen, the nation's largest farm lender is struggling to reach firmer ground. The problems at the Farm Credit System are bleak: an increasing number of farm loans are going bad, reserves are dwindling. Officials now hope that by making concessions with delinquent borrowers - reducing their total loans or cutting their interest rates - the system can begin to clear out its pile of nonearning loans.

This shift of strategy is overdue, according to many observers.

Leading the change is Farm Credit's St. Paul district. Last month it announced a dramatic plan to restructure more than half of its $1.5 billion in problem loans by the end of this year.

``If that means that loan can again become a paying loan ..., and if that means the farmer can stay on his farm and contribute to the community, then we need to restructure that loan,'' says district spokesman Jim Ruen. The program ``allows us to recover the highest possible rate from that loan.''

One innovation is that the farmer with the restructured loan agrees to share the windfall if the value of his land rises during the term of the loan.

This attitude marks an important shift from the early 1980s, when some parts of the system overreacted to the agricultural slump and adopted a hard-nosed, inflexible approach toward delinquent borrowers. As late as last June, for example, only 276 of nearly 57,000 problem and potential problem loans had been restructured at the system's Federal Land Banks. These banks make long-term loans. For the system's short-term lenders, the Production Credit Associations, 2,028 of nearly 45,000 had been restructured.

``The biggest problem that we saw was that Farm Credit was inundated with problem situations,'' says Tom Brown, executive vice-president of the Farm Credit Capital Corporation, one of the system's central entities encouraging change. Two districts in particular, Omaha and Spokane, were hard-hit. Now, he says, ``we've seen some real progress in Omaha and Spokane.''

The new attitude - if it spreads to all parts of this fragmented, slow-moving bureaucracy - comes none too soon, many observers say. Farm Credit appears to have lost a lot of credibility in many parts of the farm belt, not because it had to liquidate some operations, but because of the hard-nosed tactics it used.

``Their name is a cussword in agriculture country,'' says Harold Adams, a retired loan officer for Production Credit in Highland County, Ohio. ``When the chips are down, who let them [the farmers] down first? The Farm Credit System.''

Many delinquent borrowers would have lost their farm in any case. But Mr. Adams and other former employees insist the system would have lost less money from farm bankruptcies and lawsuits had it tried to work problems out with its customers.

Farmer David Wood of North Salem, Ind., recalls that when he couldn't make a payment on a tract of land, he was told by a Federal Land Bank official: ``Either pay us or we'll take your farm.'' Three years ago, that's what happened. The Federal Land Bank took over the land from the heavily indebted farmer and auctioning it off on much more favorable terms to another farmer. Instead of paying $1,100 an acre, as he had, Mr. Wood says the new farmer got the land for only $700 an acre with a break on the interest rate.

While Wood got out of farming, others have stood and fought Farm Credit in the courts.

``I'm willing to let a jury decide my fate,'' says Tony Dryak, an Ohio farmer. He claimed in court that his Production Credit Association was negligent because it didn't allow him to use certain financial techniques that would have locked in a profit. The Highland County judge was set to rule against him but granted a new trial because it appeared that one of the Production Credit documents was altered.

In Indiana, so many complaints about Farm Credit have come in that US Sen. Richard Lugar has asked the General Accounting Office and Farm Credit regulators to investigate four offices of the system in the state.

``There appears to be a pattern developing,'' says Keith Luse, the Republican senator's state director. There's ``an increasing number of complaints of inconsistent handling of cases.''

One of the early complaints came from Dale and Brenda Mantooth of Rushville, Ind. In a widely publicized trial, they charged that their Production Credit Association forced them into insolvency. They lost their case but are attracting a lot of support as they plan for an appeal.

Last November neighbors and friends pitched in and helped the Mantooths raise $39,000 in a few hours' time. The money paid for an appeal bond that stopped the forced sale of some of their land just eight minutes before the sale was to start.

``I think it's wonderful,'' Mrs. Mantooth says. ``We believe we'll get a new trial.''